Energy Policies of IEA Countries: Hungary Review

Hungary+

12/06/03

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I N T E R N AT I O N A L E N E R G Y A G E N C Y

Energy Policies of IEA Countries

HUNGARY

2003 Review

(61 2003 08 1 P1) €75 ISBN 92-64-01470-5

9:HSTCQE=UVY\UV:

2003 Review

As part of the IEA’s periodic review process of its Member countries, this report analyses Hungary’s energy sector and policies, and provides proposals and recommendations for the Hungarian government.

HUNGARY

Hungary still faces a number of challenges however. In the electricity sector, it needs to ensure that MVM, the largest utility, does not cause distortions through its market power. Security of gas supply is vital for Hungary. Opening the Hungarian upstream market to increase indigenous gas production and to facilitate competition is a positive step. But domestic production is not sufficient. Limited gas-to-gas competition, uncertainty as to future gas demand and the oligopolistic structure of gas distribution companies may constrain the development of competition. Finally, policies which cap energy prices to address social welfare concerns discourage energy saving, distort fuel choices and discourage investment by energy firms.

Energy Policies of

Hungary has made remarkable progress in liberalising its energy markets, as part of the government's aim to strike a balance between energy security, economic efficiency and environmental protection. A new Electric Power Act was passed in December 2001, partially opening the electricity market to competition by 2003 and to full competition by the time Hungary accedes to the European Union in 2004. A new law on gas will be approved in 2003 introducing competition in the gas market.

Energy Policies of IEA Countries

HUNGARY 2003 Review

I N T E R N AT I O N A L E N E R G Y A G E N C Y

Energy Policies of IEA Countries

HUNGARY 2003 Review

INTERNATIONAL ENERGY AGENCY 9, rue de la Fédération, 75739 Paris, cedex 15, France

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT

The International Energy Agency (IEA) is an autonomous body which was established in November 1974 within the framework of the Organisation for Economic Co-operation and Development (OECD) to implement an international energy programme.

Pursuant to Article 1 of the Convention signed in Paris on 14th December 1960, and which came into force on 30th September 1961, the Organisation for Economic Co-operation and Development (OECD) shall promote policies designed:

It carries out a comprehensive programme of energy cooperation among twenty-six* of the OECD’s thirty member countries. The basic aims of the IEA are:

• to achieve the highest sustainable economic growth and employment and a rising standard of living in member countries, while maintaining financial stability, and thus to contribute to the development of the world economy;

• to maintain and improve systems for coping with oil supply disruptions; • to promote rational energy policies in a global context through co-operative relations with nonmember countries, industry and international organisations; • to operate a permanent information system on the international oil market; • to improve the world’s energy supply and demand structure by developing alternative energy sources and increasing the efficiency of energy use; • to assist in the integration of environmental and energy policies.

* IEA member countries: Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, the Republic of Korea, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom, the United States. The European Commission also takes part in the work of the IEA.

• to contribute to sound economic expansion in member as well as non-member countries in the process of economic development; and • to contribute to the expansion of world trade on a multilateral, non-discriminatory basis in accordance with international obligations. The original member countries of the OECD are Austria, Belgium, Canada, Denmark, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The following countries became members subsequently through accession at the dates indicated hereafter: Japan (28th April 1964), Finland (28th January 1969), Australia (7th June 1971), New Zealand (29th May 1973), Mexico (18th May 1994), the Czech Republic (21st December 1995), Hungary (7th May 1996), Poland (22nd November 1996), the Republic of Korea (12th December 1996) and Slovakia (28th September 2000). The Commission of the European Communities takes part in the work of the OECD (Article 13 of the OECD Convention).

© OECD/IEA, 2003 Applications for permission to reproduce or translate all or part of this publication should be made to: Head of Publications Service, OECD 2, rue André-Pascal, 75775 Paris cedex 16, France.

TABLE OF CONTENTS 1

SUMMARY OF CONCLUSIONS AND RECOMMENDATIONS . . . .

2

ORGANISATION OF THE REVIEW

..........................

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GENERAL ENERGY SCENE AND ENERGY POLICY . . . . . . . . . . . .

17

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ENERGY EFFICIENCY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

35

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ENERGY AND THE ENVIRONMENT . . . . . . . . . . . . . . . . . . . . . . . . .

51

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RENEWABLE ENERGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

59

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FOSSIL FUELS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

65

8

ELECTRICITY AND NUCLEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107

9

RESEARCH, DEVELOPMENT AND DEMONSTRATION . . . . . . . . . 137

A

ANNEX: ENERGY BALANCES AND KEY STATISTICAL DATA . . . . . . 141

B

ANNEX: INTERNATIONAL ENERGY AGENCY “SHARED GOALS” . . 145

C

ANNEX: GLOSSARY AND LIST OF ABBREVIATIONS . . . . . . . . . . . . 147

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Tables and Figures TABLES 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.

General Economic Features, 1997 to 2001 . . . . . . . . . . . . . . . . . . . . . . . . Energy End-use Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Excise Duty Levels for Liquid Fuels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2001 Objectives and Results of Energy-saving Programmes within the Széchenyi Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Activities Implemented Jointly in Hungary . . . . . . . . . . . . . . . . . . . . . . . . Air Pollutants in Hungary, 1992 to 1998 . . . . . . . . . . . . . . . . . . . . . . . . . Renewable Energy in Hungary, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Petrol Stations in Hungary, 1998 to 2000 . . . . . . . . . . . . . . . . . . . . . . . . Gas Consumption by Sector, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Principal Coal Mines in Hungary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Licence Holders of the Hungarian Electricity Industry, 2001 . . . . . Average Electricity Prices of Representative Consumer Groups (taxes excluded), 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Origin and Distribution of Capital Ownership in the Hungarian Electricity Sector, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

19 30 31 39 53 55 59 73 84 103 108 123 127

FIGURES 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.

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Map of Hungary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Primary Energy Supply in IEA Countries, 2001 . . . . . . . . . . . . . Energy Production by Source, 1973 to 2020 . . . . . . . . . . . . . . . . . . . . . . Total Primary Energy Supply, 1973 to 2020 . . . . . . . . . . . . . . . . . . . . . . Total Primary Energy Supply and Total Final Consumption, 1990 to 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Primary Energy Supply and Gross Domestic Product, 1990 to 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Energy Intensity in Hungary and in Other Selected IEA Countries, 1973 to 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Energy Intensity in Hungary and in Other Selected IEA Countries, 1973 to 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Final Consumption by Sector, 1973 to 2020 . . . . . . . . . . . . . . . . Total Final Consumption by Sector and by Source, 1973 to 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Energy-related CO2 Emissions per GDP in Hungary and in Other Selected IEA Countries, 1973 to 2010 . . . . . . . . . . . . . . CO2 Emissions by Fuel, 1973 to 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CO2 Emissions by Sector, 1973 to 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . .

18 21 23 23 36 36 37 40 40 41 51 52 52

14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42.

Final Consumption of Oil by Sector, 1973 to 2020 . . . . . . . . . . . . . . . Oil and Gas Exploration Concession Areas . . . . . . . . . . . . . . . . . . . . . . . . Oil Infrastructure in Hungary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Refineries in Central and Eastern Europe . . . . . . . . . . . . . . . . . . . . . . . . . . Fuel Prices, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . OECD Unleaded Gasoline Prices and Taxes, Third Quarter 2002 . . OECD Automotive Diesel Prices and Taxes, Third Quarter 2002 . . Main Gas Distribution and Supply Areas in Hungary . . . . . . . . . . . . . Ownership Structure of Regional Gas Distribution Companies . . . Natural Gas Transportation Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . Final Consumption of Natural Gas by Sector, 1973 to 2020 . . . . . Monthly Gas Consumption, January 1994 to April 2002 . . . . . . . . Indigenous Gas Production and Imports, 1973 to 2020 . . . . . . . . . Gas Storage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gas Prices in Hungary and in Other Selected IEA Countries, 1980 to 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gas Prices and Taxes in IEA Countries, 2001 . . . . . . . . . . . . . . . . . . . . . Functional Model of the Hungarian Gas Industry . . . . . . . . . . . . . . . . . The New Gas Market Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Final Consumption of Coal by Sector, 1973 to 2020 . . . . . . . . . . . . . Electricity Distributors and Retailers in Hungary . . . . . . . . . . . . . . . . . . Electricity Generation by Source, 1973 to 2020 . . . . . . . . . . . . . . . . . . Electricity Flow Diagram . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Import and Export of Electricity, 1990 and 2000 . . . . . . . . . . . . . . . . . The Hungarian Transmission Network and Main Power Plants . . . Final Consumption of Electricity by Sector, 1973 to 2020 . . . . . . . . Yearly Electricity Consumption per Inhabitant in the Supply Regions, 1980, 1990 and 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Electricity and Heat Regulated Price Formation, 1 January 2001 to 31 December 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Electricity Prices in IEA Countries, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . Electricity Prices in Hungary and in Other Selected IEA Countries, 1985 to 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

66 68 69 72 74 76 77 80 81 83 85 85 87 89 91 92 95 97 101 109 111 112 114 115 116 117 121 124 125

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SUMMARY OF CONCLUSIONS AND RECOMMENDATIONS SUMMARY The aim of Hungary’s energy policy is to strike a balance between energy security, economic efficiency and environmental protection, in line with the IEA Shared Goals. In 1999, the “Hungarian Energy Policy Principles and the Business Model of the Energy Sector” (Resolution 2199/1999 VIII. 6) was published. This document promoted the following policy principles and objectives: ●

Creation of an efficient domestic energy market functioning as an integral part of the single European energy market, but respecting national particularities, serving both economic competition and consumer protection.

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Preservation and augmentation of the security of energy supply.

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Enforcement of environmental protection requirements on both future developments and existing generating and energy-consuming plants.

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Improvement of public scrutiny and information, democratic control and, for the remaining monopolies, transparent price regulation.

Hungary continued its remarkable progress in energy market liberalisation since the last In-depth Review, creating the conditions for an electricity market to develop on similar grounds as in other European countries, and paving the way for a natural gas market. A new Electric Power Act was passed in December 2001, introducing competition into the restructured power industry and making Hungarian legislation in this area compatible with EU directives. In 2003, the Hungarian electricity retail market will be partially opened to competition and then gradually fully opened by the time Hungary is admitted to the European Union (EU). A new gas law is being discussed and will probably be approved in 2003. This law will pursue the liberalisation of the gas sector, with an initial opening of the gas market to 25% of gas consumption, creating a new gas pricing mechanism and discontinuing the practice of setting prices for gas produced in Hungary. The government deserves full credit for its determination to pursue reforms. While the strong driving force in energy policy has clearly been the need to conform to the acquis communautaire 1 given the prospect of EU accession, it is also a step towards a more efficient energy system. 1. The acquis communautaire is a term used to designate the current state of EU legislation and procedures.

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Despite these positive developments, Hungary faces a number of challenges. In the electricity sector, it needs to ensure that the state electricity generation and grid company (MVM) does not cause market distortions given its importance in the market. In particular, existing long-term contracts of MVM should be monitored, since the company has access to low-cost nuclear facilities, influencing effective competition. The independent system operator (MAVIR) was established in 2002, but the ownership of transmission lines remains with MVM. MAVIR’s responsibilities need to be further strengthened. Capacity and transmission constraints are also causes of concern. Hungary is likely to encounter capacity constraints around 2005 when some of the old coal-fired plants will be closed in line with EU environmental directives. There could also be severe congestion in the interconnection between the Slovak Republic and Hungary. The government will need to monitor generation, transmission and interconnection capacities. Security of natural gas supply is vital for Hungary given the high share of natural gas in the energy mix. It is therefore commendable to strive to open the Hungarian upstream market to increase indigenous gas production and facilitate competition. Domestic production prospects could be limited, because of uncertainties concerning the regulation of the natural gas market given the delayed implementation of the proposed Gas Act. The act should be adopted and implemented as quickly as possible. Limited gas-to-gas competition due to the strong dominance of Russian gas, uncertain future gas demand given uncertain electricity demand and the oligopolistic structure of gas distribution companies are fundamental constraints to the development of strong and healthy competition in the Hungarian natural gas market. The appropriate authorities, including the Hungarian Energy Office (MEH), should monitor the development of the gas market, in particular the implication of existing take-or-pay (TOP) contracts, limited sources of supply and interaction with stranded costs as market conditions develop. While the new legislation has increased MEH’s independence, key pricing decisions for non-eligible consumers are still a government responsibility. Despite recent efforts for prices better to reflect costs, a policy to keep energy prices low for certain categories of consumers for social reasons still exists. This policy has various harmful effects, such as discouraging energy saving and distorting fuel choices. Furthermore, low prices have discouraged investment by domestic energy firms such as MVM and the Hungarian oil and gas company (MOL) because the policy has caused financial losses and rendered economic viability of new investment uncertain. This could have serious implications for energy security. The government should provide a clear timetable with milestones for price increases to market levels for gas and electricity. To avoid possible conflicts of interest, it should give full responsibility to the MEH, not only to calculate prices, but also to set them.

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As in many other transition countries, Hungary’s energy policy has for a long time focused on the expansion of energy supply, while paying little attention to costs and economic efficiency. During the past decade, the government increased its emphasis on the demand side, but its primary focus remains largely on the supply side, i.e. securing supply, introducing competition in the energy markets and diversifying energy sources. Weak emphasis on the energy demand side could be problematic in the future. Final energy consumption has been quite stagnant in past years, largely because of economic restructuring, during which several energy-intensive industries shrunk and less energy-intensive industries emerged and grew. Economic restructuring is likely to slow down, which will lead to growth in final energy consumption, following a gradual increase of GDP per capita. In the future, some specific sectors of the Hungarian economy will require more focus on increased energy efficiency, in particular the building sector, small and medium-sized enterprises and the transport sector. Renewable energy potential, though limited, largely remains to be developed in Hungary. Significant near-term potential lies in bioenergy resources and renewable municipal wastes for electricity and heat production, and in geothermal energy for heat. However, current grants and funds without clear technology or market priority may eventually support technologies that have little economic relevance in Hungary. Similarly, the use of a single feed-in tariff for electricity generated from renewable sources may end up supporting relatively high-cost renewable energy options while generating rents for lowercost options. The current policy framework for renewables will need to be improved to better reflect cost-effectiveness.

RECOMMENDATIONS The government of Hungary should: General Energy Policy ◗

Establish an indicative timetable for price increases to market levels for gas and electricity for non-eligible consumers.

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Address social hardship through social policy measures, not through energy prices.

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Establish a timetable for handing price control responsibilities to the MEH.

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Ensure that the Directorate-General for Energy is adequately staffed and has sufficient resources to administer the energy market liberalisation process.

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Organise, in a transparent fashion, the contributions of the different representative bodies of consumers of the network industries (electricity, gas, district heating) to avoid any risk that certain groups of consumers would have a favoured position in influencing government policy.

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Define a timetable to improve energy quality and reduce technical and nontechnical losses.

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Devise indicators for monitoring the quality of energy supply (electricity, gas), in co-operation with all the energy stakeholders.

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Design and implement a system of improved measures (detection and sanctions or penalties) against electricity pilferage.

Energy Efficiency ◗

Continue to strengthen the close co-ordination among all energy efficiency plans involving national, European and international institutions to make optimal use of such expertise and funding.

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Provide the Energy Centre with an adequate budget, staff and executive powers to allow it to fulfil its tasks at both national and international levels.

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Investigate through the MEH and the Hungarian Competition Office whether heat prices are being set on a reasonable cost-reflective basis and, if not, devise and implement an appropriate solution to avoid price distortions between heat and power that would negatively affect investment in and modernisation of combined heat and power (CHP) and district heating systems.

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Give priority to strengthening energy efficiency in the building sector through the implementation of EU regulations on energy-efficiency standards in the household sector, improve and enforce the mandatory thermal insulation standards and strengthen the programme for retrofitting the energyinefficient housing stock.

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Strengthen energy audits in industry (including small and medium-sized enterprises), and measures to encourage the audited enterprises to implement recommended cost-effective measures.

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Establish and implement a comprehensive long-term energy efficiency Transport Plan with clear objectives supported by adequate cost-effective measures and investments funded over the long term to limit the growth of road transport. Include measures to stimulate investment in public transport, on driver behaviour (car labelling for example) and on the diffusion of cleaner fuels and low-emission vehicles.

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Strengthen the appropriate measures and capacities to carefully monitor and assess all the energy efficiency programmes and measures, and adjust them according to the changing economic context.

Energy and the Environment ◗

Establish a clear institutional framework for Joint Implementation (JI) projects to facilitate access of foreign investors and minimise transaction costs. Consider whether to use the existing emissions trading surplus under the Kyoto Protocol to encourage early investment in JI projects.

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Consider broader participation in international emissions trading under the Kyoto Protocol and how the government can improve Hungary’s environmental performance, e.g. through financing additional projects to reduce greenhouse gas emissions.

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Define a timetable for joining an emissions trading regime.

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Maximise transparency on environmental issues to encourage public acceptance.

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Continue to seek improvements in local pollutant emissions levels.

Renewable Energy ◗

Create a roadmap for renewable energy resource development, highlighting economic potential in priority technologies.

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Evaluate the added value of expanding technology co-operation through the IEA Implementing Agreements.

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Anticipate that the future level of support will gradually decline as viable technologies are identified and sustainable markets are developed.

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Work towards the introduction and development of market-oriented policy instruments as the mainstream for cost-effective exploitation of renewables.

Fossil Fuels Oil ◗

Make sure that the relevant competition authorities continue to monitor whether oligopoly is developing in the regional market and if there is a need for regulatory action.

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Consider reducing the price distortion created by the relatively high excise duty on light fuel oil in order to diversify energy supplies for heating.

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Ensure the implementation of the law requiring that MOL submit the necessary data for the reporting requirement under international commitments.

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Adopt the proposed Gas Act as soon as possible to implement a stable regulatory tax and pricing regime as a means to reduce uncertainties for all market participants, including domestic gas producers.

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Price all gas in the wholesale market on a market-related basis.

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If the government decides to impose an “excess profits tax” to capture, for the public benefit, excess profits derived from gas production at facilities that have been fully written down, ensure that such a tax only captures genuine “excess” profits.

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Continue to monitor the effects on competition of existing TOP contracts, limited sources of supply and interaction with stranded costs.

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Set up the conditions to facilitate the decision by MOL (or others) to install additional gas storage facilities, keep this option under review in consultation with the MEH and allow tariffs to reflect storage costs.

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Address the social consequences of bringing gas prices to market-related levels through targeted social policy measures.

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Develop a contingency plan for possible supply disruption, to ensure that appropriate co-ordinated emergency arrangements are put in place to avoid gas supply shortfalls, and for the safe reconnection of consumers in the event of a gas supply shortfall.

Gas

Electricity and Nuclear Electricity ◗

Give MAVIR more extensive responsibilities in the management and operation of the network and strengthen MAVIR’s responsibilities as an independent system operator.

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Ensure that balancing services provided by MAVIR are priced on a competitive basis.

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Ensure that appropriate arrangements are made for MAVIR to monitor the adequacy of the transmission network cross-border interconnection capacity.

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Monitor the development of competition to avoid excess market power exerted by companies through long-term contracts.

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Address the problem of electricity pilferage.

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Review the arrangements for price caps as a means of price regulation, ensuring that social objectives are pursued through means other than energy prices.

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Strengthen the MEH’s autonomy in regulating electricity.

Nuclear ◗

Take decisions on the nuclear waste disposal framework as soon as possible, consistent with a full safety assessment.

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Continue to ensure a high level of safety and maintain public confidence in nuclear plant operations, by securing the independent position of the Hungarian Atomic Energy Authority (HAEA) to regulate nuclear safety.

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Take the necessary steps to separate the management of the Public Agency for Radioactive Waste Management (PURAM) from HAEA in order to clarify the relationship between the safety regulator and the licensee.

Research, Development and Demonstration ◗

Design and implement a comprehensive energy RD&D strategy integrating the existing fragmented programmes and clearly setting priorities.

◗

Consider joining IEA Implementing Agreements.

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ORGANISATION OF THE REVIEW REVIEW TEAM An IEA review team visited Hungary in October 2002 to review the country’s energy policies. This report was drafted on the basis of information received during and prior to the visit, including the official Hungarian government’s response to the IEA 2002 policy questionnaire, and the views expressed by various parties during the visit. Pierre Audinet managed the review process and is the main author of this report. The team greatly appreciated the openness and co-operation shown by everyone it met. The members of the team were: Mr. John Havard (Team Leader) Assistant Director Energy Markets Unit Department of Trade and Industry United Kingdom Mrs. Helen Gratsia Head of Energy Statistics Section Energy Policy Directorate Ministry of Development Greece Mrs. Karina Veum Adviser, Energy Section Ministry of Petroleum and Energy Norway

Mr. Olivier Appert Director, Long-Term Co-operation and Policy Analysis Office International Energy Agency Mr. Alain Bilot Administrator, Energy Efficiency Policy Analysis Division International Energy Agency Mr. Pierre Audinet (Hungary Desk Officer) Administrator Country Studies Division International Energy Agency

Mr. Timo Haapalehto Administrator OECD Nuclear Energy Agency

ORGANISATIONS VISITED The team held discussions with representatives of the following organisations: Association for the Protection of Consumers (OFE), www.ofe.hu Association of Gas Distribution Companies (GE), www.hungas.hu Association of Hungarian Energy Consumers (MESZ)

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Budapest Electricity (ELMÜ), www.elmu.hu Clean Air Group (Levegö Munkacsoport), www.levego.hu Coal Mining Restructuring Centre (SZÉSZEK), www.szeszek.hu E.ON Hungária, www.eon-hungaria.hu El Paso Hungary (EL-PASO) Energy Centre (Energia Központ), www.energycentre.hu Energy Club (Energia Klub), www.energiaklub.hu Hungarian Association of Electricity Distributors (MÁE) Hungarian Atomic Energy Authority (HAEA), www.haea.gov.hu Hungarian Competition Office (GVH), www.gvh.hu Hungarian District Heating Association (MATA'SZSZ) Hungarian Energy Office (MEH), www.eh.gov.hu Hungarian Petroleum Association, www.petroleum.hu Industrial Energy Consumers’ Forum (IEF), www.ief.hu Institute for Electric Power Research (VEIKI), www.veiki.hu MAVIR, www.mavir.hu Ministry of Agriculture, www.fvm.hu Ministry of Economy and Transport, www.gkm.hu Ministry of Education, www.om.hu Ministry of Environment and Water, www.kvvm.hu MOL, www.mol.hu MVM, www.mvm.hu North-Transdanubian Gas Supply Corporation (ÉGÁZ) Paks Nuclear Power Plant, www.npp.hu Public Agency for Radioactive Waste Management (PURAM), www.rhk.hu World Wide Fund Hungary, www.wwf.hu

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GENERAL ENERGY SCENE AND ENERGY POLICY OVERVIEW Hungary is a landlocked country in the centre of Europe. It borders on Austria, Croatia, Romania, Serbia and Montenegro, the Slovak Republic, Slovenia and Ukraine and has a surface area of 93 000 km2. The country has a temperate climate. Hungary transitioned from a communist state to a democracy relatively smoothly and held its first free, multi-party parliamentary election in March 1990. Prior to this important change, Hungary had already led significant market reforms that provided a competitive edge to its economy. Hungary’s infrastructure, particularly that of the energy sector, has features that date back to the time it was a communist state within the Council of Mutual Economic Assistance (COMECON), when the focus was on developing large collective energy delivery systems to facilitate energy access rather than on efficiency or cost. The first post-communist government encountered problems in the transition to a market-based economy. Real gross domestic product (GDP) fell by about 18% from 1990 to 1993 and industrial output also shrank, while foreign debt, current account deficit and budget deficit rose to high levels. Inflation increased and consequently price controls became a major focus of the government’s macroeconomic policy. In 1995, the government instituted an austerity and privatisation programme and a new export-promoting foreign exchange regime to reduce the debt and deficit levels. By 1997, the country's finances were solid; Hungary had repaid all of its debts to the International Monetary Fund (IMF) and no longer required its assistance. Hungary had also developed close political and economic ties to the rest of Europe. It joined NATO in 1999. Breaking away from the COMECON signified a re-direction of Hungary’s external trade flows, clearly noticeable in the shift in export shares, declining towards Russia and growing towards western European countries. Hungary is part of the Visegrád Group formed in 1991 to facilitate co-operation among a few central European countries on issues pertaining to European integration2. Hungary has been a front runner in the future expansion of the EU. The talks preceding EU accession have been progressing in line with 2. The name of this group was chosen by Václav Havel, President of the then Czechoslovakia, József Antall, Prime Minister of Hungary, and Lech Walesa, President of Poland, during a meeting that took place in Visegrád, Hungary on 15 February 1991. During the meeting the leaders signed a declaration on close co-operation of the three (today four) countries that were on their way to European integration. After the collapse of the communist regime, their co-operation was important for the transition from a totalitarian regime to a free, pluralistic and democratic society.

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Figure 1 Map of Hungary 18

the "road map" marked out by the European Commission for 2004 accession. Hungary has complied with the acquis communautaire including the section on energy.

Table 1 General Economic Features, 1997 to 2001

3

GDP at market prices (HUF billion) GDP (US$ billion using market exchange rate) Real GDP growth (%)

1997

1998

1999

2000

2001

8 540.7

10 087.4

11 393.5

13 150.8

14 876.4

45.7

47.0

48.0

46.5

51.9

4.6

4.9

4.2

5.2

3.8

Consumer price inflation (average; %)

18.3

14.1

10.0

9.8

9.2

Population (million)

10.2

10.2

10.1

10.0

10.0

Source: OECD, National Accounts.

While GDP declined substantially between 1990 and 1993, it grew substantially thereafter. In the OECD Economic Survey of Hungary 2002, Hungary is referred to as one of the fastest growing OECD economies, with GDP having expanded at an average annual rate of 4.5% between 1997 and 2001 while unemployment fell from 8.9% to 5.8% during the same period. Despite rapid output growth, consumer price inflation decelerated between 1997 and 2001 from 18% to 9% and the current account deficit was reduced. From the second half of 2001, the economy faced its first endogenous slow-down of the post-transition period, made more severe by the slow-down in world economic growth, while a new exchange rate regime tightened monetary conditions in order to attain a more ambitious price reduction objective. Real annual GDP growth slowed to 2.9% in the first quarter of 2002 and inflation continued to decrease 4. In 2001, Hungary’s per capita GDP reached 52% of the OECD average. Hungary has modernised the supply side of its economy and improved its structural performance through successive macroeconomic reforms. Today, the principal policy challenge is to close as quickly as possible the large gap in living standards, as measured by GDP per capita, which separates Hungary from advanced OECD economies. The catch-up process was unleashed by bold structural reforms. Key factors of productivity advances included policies

3. Between 1999 and 2002, one Hungarian forint (HUF) averaged about US$ 0.004. 4. See OECD, Economic Survey of Hungary 2002, Paris.

19

that put strong pressure on firms to reduce costs, entailed a radical opening of the economy to foreign investment 5 and imports, and the establishment of a business-friendly environment with a reasonably flexible labour market. Productivity was subsequently enhanced by massive inflows of foreign direct investment that introduced best business practices, contributed significantly to capital formation in the private sector and upgraded labour skills. In April 2002, a new government was elected. It rapidly drew up its macroeconomic strategy, emphasising a high degree of continuity with its predecessors' plans to reform the Hungarian economy. Having won the election against the background of a downturn in real GDP growth rates, the new administration set sustained growth of 5% to 6% as the long-term goal of its economic policy. Policies for industrial support, infrastructure development and public-sector reform are being designed to achieve this acceleration. The government also plans to implement measures to reduce the budget deficit. Its margins of manoeuvre to support economic growth through fiscal measures are limited by the need to virtually halve the yearly public deficit over the next four to five years if admission to the European Union (EU) Economic and Monetary Union (EMU) is to occur approximately two to three years after accession, in accordance with the government's stated goal. The new administration is pursuing the goal of harmonisation with EU law to improve the transparency and accuracy of public-sector accounting. By accelerating the adoption of EU (ESA-95) reporting rules, the main areas of expenditures that were previously concealed off-budget have been brought on-budget. For example, it is now transparent that MVM is currently demanding extra subsidies to cover losses resulting from stateimposed caps on wholesale power prices, and may require ongoing funding for its Paks nuclear power plant.

ECONOMY, ENERGY SUPPLY AND DEMAND In 2000, Hungary’s GDP measured by using constant 1995 purchasing power parities (PPPs) represented US$ 112.9 billion. It was a little smaller than Norway’s (US$ 118 billion) and a bit larger than Ireland’s (US$ 104 billion). Hungary is characterised by a slightly decreasing demographic trend. Its population reached 10 million inhabitants in 2000, similar to that of Portugal or Belgium. In 2001, GDP per capita grew to reach US$ 13 232 using PPP. In 2000, the total primary energy supply (TPES) amounted to 24.8 Mtoe, equivalent to Portugal and a little below Norway. Hungary’s TPES systematically decreased between 1990 and 2000, excepting the years 1995

5. At more than US$ 2 000 per capita in 2000, foreign direct investment inflow in Hungary is one of the highest in the region.

20

Figure 2 Total Primary Energy Supply in IEA Countries, 2001* Luxembourg Ireland Netherlands Greece Italy Australia Denmark Czech Republic United Kingdom Turkey Portugal United States Germany Korea Hungary Japan Spain Belgium Austria Canada New Zealand Finland Switzerland Norway France Sweden

Coal Oil Gas Combustible renewables Hydro Nuclear Other**

0%

10%

20%

30%

40%

21

** preliminary data. ** includes solar, wind and ambient heat production Source: Energy Balances of OECD Countries, IEA/OECD Paris, 2002.

50%

60%

70%

80%

90%

100%

and 1996, at an average rate of –1.7% per annum. Between 1999 and 2000, TPES reduced by 1.6%, after two years of stagnation. The energy sector contributed 6.5% of the GDP in 2000. Though energy supply in Hungary is fairly diversified, almost all of Hungary’s TPES is derived from fossil fuels. In 2000, coal and oil represent large but gradually decreasing shares, equivalent to 16% and 28% respectively. Gas confirms its leading role with almost 40% of TPES in 2000. Nuclear remains important, accounting for 15% of the energy supply in 2000 and maintaining a large role in electricity supply. Combustible renewables and wastes (1.5% in 2000 against 1.2% in 1990) and hydro (stable at 0.1%) are negligible. Since 1990, almost all primary energies have decreased, the main change being a fall in coal use by more than 4% between 1990 and 2000. In a scenario implementing policies to mitigate CO2 emissions and promote energy diversification, the government projects primary energy supply to grow at an annual rate of approximately 1% between 2000 and 2020 to reach 27 Mtoe in 2010 and 29 Mtoe in 2020. By 2020, the share of coal is expected to decrease to 11%, oil to remain roughly stable at 31% and gas to grow slightly to 41%, while nuclear is expected to decrease to 13%. Hungary is a small producer of oil (34 kbd or 1.7 Mt in 2001 including condensate and natural gas liquids) and net dry gas (3.2 bcm in 2001, against 3.4 bcm in 1999). In 2000, Hungary imported 16 Mtoe, out of which 5.8 Mtoe was crude oil, 7.3 Mtoe was natural gas and 1.2 Mtoe was coal. During this period, Hungary exported a total of 2.4 Mtoe energy, of which 1.7 Mtoe of petroleum products and 0.5 Mtoe of electricity. In 2001, fuel and electricity represented 8.2% of imports and 1.9% of exports. Hungary’s external energy dependency grew from 47% in 1994 to 56% in 2000 6. The energy intensity of the Hungarian economy, measured as a ratio of TPES to GDP, improved between 1990 and 2000, from the tenth highest in OECD countries (lower than North America), at 0.27 toe per unit of GDP (in US$ 1995 PPP), to the thirteenth highest, at 0.22 toe per unit of GDP, roughly equivalent to the IEA average. In 2000, Hungary displayed one of the lowest energy supply per capita of OECD and IEA countries, with 2.5 toe versus the IEA average of 5.2 toe. With 0.13 toe of oil supply per thousand US dollars (1995) of GDP in 2000, Hungary had one of the highest oil intensity, largely above the IEA average of 0.08 toe and similar to Canada. However, oil supply measured per capita was among the lowest in IEA countries, with 0.7 toe in 2000. There are several reasons for these trends; the main one being an important change in GDP structure, with big investments made in light manufacturing industries (e.g. car assembling) substituting heavier industries, and efforts made to conserve energy and improve efficiency in the residential 6. Imports minus exports divided by TPES.

22

Figure 3 Energy Production by Source, 1973 to 2020 18 16 Oil

14 12

Gas

10

Coal

8

Other*

6

Nuclear

Mtoe

4

Hydro

2 0 1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

* includes geothermal, solar, wind, combustible renewables and wastes. Sources: Energy Balances of OECD Countries, IEA/OECD Paris, 2002; and country submission.

Figure 4 Total Primary Energy Supply, 1973 to 2020 35 30 Oil 25

Gas

20

Coal

15

Other*

10

Nuclear Hydro

Mtoe

5 0 1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

* includes geothermal, solar, wind, combustible renewables and wastes. Sources: Energy Balances of OECD Countries, IEA/OECD Paris, 2002; and country submission.

23

and industry sectors. This resulted in an improvement in Hungary’s ranking on an international scale of energy intensities measured as TPES per unit of GDP. However, since per capita energy consumption in Hungary is still relatively low, there is large scope for additional gains in actual energy efficiency. Total final consumption (TFC), in line with TPES, displayed negative growth on average during the 1990s, at an annual rate of –2.2% (from 1990 to 2000). TFC decreased radically in the first half of the 1990s and almost stagnated during the second half. In 2000, TFC rebounded by 1.5%, reaching 17.4 Mtoe. In 2000, transmission and distribution losses accounted for 17% of total final electricity consumption, against 7% on average for the IEA or the EU. These high losses affect the quality of electricity being delivered to final consumers.

ENERGY POLICY Hungarian energy policy aims to maintain a balance between security of supply, cost-effective delivery of energy to the economy, energy efficiency and the environment. The Hungarian energy sector is still in transition and is expanding its energy markets with the perspective of becoming an EU member State. The energy policy resolution adopted by the Hungarian Parliament in 1993 [21/1993(IV.9)OGY] outlines the following strategic objectives: ●

Diversification of energy supplies and elimination of import dependence on the former Soviet Union (mainly Russia).

●

Improved protection of the environment and pollution mitigation.

●

Increased energy efficiency through the modernisation of supply structures and better management of electricity consumption.

●

Improved public acceptance of new energy facilities through provision of better information to the general public.

The general aim of this resolution was to lay the foundations for an open energy economy, gradually being integrated in the EU. Between 1994 and 1996, three major pieces of legislation were adopted, which created the necessary conditions for privatisation of the incumbent energy public companies: (i) the Act on Gas Supply (1994), (ii) the Act on Producing, Transmitting and Distributing Electricity (1994), and (iii) the Act on Nuclear Energy (1996). The 1994 electricity and gas acts also established the Hungarian Energy Office (MEH) as the regulator of the energy sector (electricity and gas). In 1999, a new set of policy principles was conceived and adopted by the government in consultation with private energy companies and energy

24

consumers. The motivation was to outline the new medium-term objectives and to prepare a more detailed plan of action. The 1999 document entitled “Hungarian Energy Policy Principles and the Business Model of the Energy Sector” (Resolution 2199/1999 VIII.6) defined the following objectives: ●

Creation of an efficient domestic energy market functioning as an integral part of the single European energy market, but respecting national particularities, serving both economic competition and consumer protection.

●

Preservation and augmentation of the security of supply.

●

Enforcement of environmental protection requirements on both future developments and existing generating and energy-consuming plants.

●

Improvement of public scrutiny and information, democratic control and for the remaining monopolies, transparent price regulation.

The 1999 document defined a number of practical transitional measures to facilitate the emergence of a competitive energy market wherever competition remains to be developed (electricity and gas). Examples of these measures include the following: ●

Bringing information to the market players on energy demand.

●

Strengthening the regulatory authorities.

●

Finding ways to solve possible conflicts arising from existing long-term power purchase contracts that are consistent with EU rules and consumer interests.

●

Bringing energy prices in line with costs.

The 1999 document provided a detailed timetable for policy implementation of market liberalisation measures until 2002. Given that a detailed timetable of tasks related to EU accession could only be finalised once the precise date of accession to the EU was determined, the government only set general objectives for the period following 2002. Further steps and the full liberalisation of export-import rights were scheduled on the basis of competitive market experiences and the final date of accession. As a consequence of European integration, the 1999 document perceives that Hungary’s energy supply security will be guaranteed beyond its national borders largely by the European energy market. For this reason the government places greater emphasis on nurturing the Hungarian energy sector’s competitivity vis-à-vis Europe than on trying to reduce its external energy dependency through domestic production or conservation. However, specific measures to protect safety of supply are implemented sector-wise: ●

For electricity, through Hungary’s UCTE membership.

25

●

For natural gas, through a relative diversification of supply origins, underground storage and a Winter Action Plan to handle domestic emergency disruptions in times of high demand.

●

For crude oil, through diversification of supply and high oil stocks.

The 1999 document announced the establishment of a national programme for energy conservation and renewable energy sources that was adopted in 1999, the Energy Conservation and Energy Efficiency Improvement Action Programme (see below for more information on this programme). The 1999 document stated as a central aspect of energy policy that “the internalisation of environment-related costs (...) must not exceed what the public can bear and must not threaten the international competitiveness of the economy”. The government considers that environmental costs will principally be determined by new EU-harmonised legislation requirements. The 1999 document and the need to conform with EU legislation and policy framework prior to accession brought about the following policy measures: ●

A new Electric Power Act, passed in December 2001, introducing competition into the restructured power industry and making Hungarian legislation in this area compatible with EU law. The law was implemented from 2002. The Hungarian electricity retail market will be partially opened to competition in 2003 (see Chapter 8 on electricity and nuclear) and then gradually fully opened by the time Hungary is admitted to the EU.

●

A new law on gas is being discussed and will probably be approved in 2003. This law will pursue the liberalisation of the gas sector, with an initial opening of the gas market to about 40% of gas consumption, creating a new gas pricing mechanism and discontinuing the practice of centrally setting prices for gas produced in Hungary. The new gas law could possibly come into effect by 1 January 2004.

●

The oil emergency stockpiling law was amended in December 2001 to add an obligation to report information on oil and oil products to the IEA and EUROSTAT.

●

Ratification of the Kyoto Protocol by the Hungarian Parliament on 16 July 2002.

The government elected in April 2002 committed itself to continue the reforms that were set out in the 1999 document. The principal institutions formulating and implementing energy policy have not changed from those found in the 1999 In-depth Review.

26

The Ministry of Economy and Transport, Directorate-General for Energy. The three divisions of the Directorate-General for Energy that control the overall implementation and formulation of the energy policies are the following: ●

Supply: oil, gas, coal, nuclear and mining.

●

Economy and regulation: includes the legal office in charge of providing support to law design.

●

Energy co-ordination and efficiency: international affairs, environment, efficiency and statistics.

The Directorate-General for Energy has a limited permanent staff of 18. The Hungarian Energy Office (MEH). It has become a large institution covering electricity, gas and also heat that is sold by power stations (with above 50 MW capacity) to district heating facilities. Regulation of district heating activities is otherwise the responsibility of the municipalities. The MEH has the following responsibilities: ●

Licensing of companies operating on the gas and electricity markets.

●

Calculating wholesale and end-user regulated gas and electricity prices and preparing the corresponding decrees that are signed by the Minister of Economy and Transport.

●

Protecting consumers’ interests.

The MEH is more independent than it used to be. It prepares an annual report to the Parliament, not the government. The president and vicepresident have six-year mandates. They are chosen by the prime minister based on a proposal made by the Ministry of Economy and Transport. The current president of the MEH was chosen in February 2002. Decisions taken by the MEH can only be opposed by a court decision, except those related to energy prices, which can be opposed by the Ministry of Economy and Transport. Its financial independence is secured by a fee on energy prices decided by the Ministry of Economy and Transport and the Ministry of Finance. The MEH has an authorised staff of 88. The Energy Centre covers energy efficiency and renewables (see details in Chapter 4 on energy efficiency). Other public institutions with a role in energy and energy policy (see other chapters for more information on these institutions) include the following:

27

●

Hungarian Atomic Energy Authority (HAEA) – regulates the use of the Paks nuclear power plant.

●

Ministry of Environment and Water – manages the control and reduction of CO2 and pollutants from the energy industry.

●

Ministry of Education – controls the national committee that prepares all R&D decisions.

●

Emergency Oil Stock Association – manages the development of strategic oil storage.

●

Ministry of Agriculture – has a role in developing agro-industrial biofuels.

●

Hungarian Competition Office (GVH) – monitors competition and mergers in the energy sector.

●

Inter-Ministerial Committee on Energy Saving – allocates funds to energysaving projects.

ENERGY SECURITY Competitivity of the energy sector is a priority for the Hungarian government, but energy security is of particular interest given that for a long time the country was highly dependent on energy imports from only one country, Russia (previously the Soviet Union). In 2000, Hungary imported 74% of its total supply of natural gas, the dominant fuel in its primary energy mix. This figure is expected to increase given that domestic production is unlikely to grow despite recent discoveries, while demand will probably continue to grow, although the pace of future growth is uncertain. All imported gas comes from Russia, although contracted supply companies have been diversified in recent years with around 8% of the imports being imported through contracts with German and French suppliers. Hungary has never experienced unexpected import cuts during several decades of purchasing gas from Russia (and previously the Soviet Union). The large volumes of Hungarian gas storage facilities, representing approximately 100 days of gas consumption, enhance natural gas security. This level of gas storage is relatively high by European standards; however, seasonality of demand imposes that gas stored is consumed – often entirely – in winter to satisfy peak demand. The majority of Hungary’s oil demand is met by imports. The percentage share of imports is expected to remain stable or climb as domestic production is stagnating and is not expected to grow, whereas demand could rise slightly, in particular to respond to the development of oil use in transport. Hungary imports crude oil only from Russia. However, its oil product imports are

28

diversified, namely from the Czech Republic, Russia, the Slovak Republic and Ukraine. Hungary has never experienced unexpected cuts in its oil imports. Hungary’s oil supply security is enhanced by its emergency preparedness measures, which are comprehensive and fully equipped to address short-term supply cuts. As of 1 October 2002, oil emergency stocks reached 200 days of 2001 net imports equivalent. Today, Hungary has a substantial reserve margin of electricity generating capacity in excess of its peak demand for power. Hungary has substantial international transmission capacities that allow for imports or exports of power. The MEH, which oversees the liberalisation of the electricity market, anticipates no problems with the issue before 2005 when it will be necessary to retire some of the coal-fired plants. Hungary is highly dependent upon nuclear electricity (40%) that is produced in one plant. The possibility of having to stop this power plant for a period of time for unanticipated reasons may cause short-term problems in electricity supply, requiring substantial imports to compensate or pushing electricity prices up.

ENERGY PRICES Gasoline and diesel prices are generally similar to those practised in Europe. However, electricity and gas prices for households are lower than in the rest of OECD Europe, principally because of government intervention to keep nominal prices relatively low for social reasons. Alternatively, prices of light fuel oil sold to industry are much higher than in the rest of Europe given that this product has long been taxed to avoid it being used illegally as a substitute for automotive diesel. Since 1997, electricity and natural gas prices are calculated according to pricing principles and price formulas defined by the MEH. Pricing is established according to a cost-plus formula. On 1 July 1999, a new electricity tariff system came into force (Decrees 9/1999 and 10/1999), which aim to comply with EU requirements for the termination of crossfinancing between consumer groups. Cost-based tariffs were introduced in natural gas by 1 July 1999 (Decree 11/1999), thereby eliminating cross-financing between consumer groups. Given the low price level of gas sold to households, it appears that there are still some cross-subsidies between products sold by MOL. The 1999 document calls for the development of a new price regulation system that takes into consideration import prices and a system of setting transmission tariffs in the competitive market. Regulated third party access (TPA) is the government’s preferred option given Hungary’s integration in the European Internal Gas Market.

29

Table 2 Energy End-use Prices (US$/toe-converted using exchange rates; including taxes)

Fuel

Hungary

OECD Europe

Ratio to OECD Europe

High sulphur fuel oil for industry*

187.9

230.0

0.8

Heavy fuel oil for electricity generation**

138.5

172.2

0.8

Light fuel oil for industry**

685.4

368.9

1.9

Automotive diesel for commercial use**

818.2

730.9

1.1

Premium unleaded gasoline (95 RON)**

941.6

1 130.4

0.8

Natural gas for industry**

176.1

192.1

0.8

Natural gas for households**

203.6

391.5

0.5

Electricity for industry***

566.4

623.6

0.9

Electricity for households***

757.1

1 241.0

0.6

*** 2002 (third quarter). *** 2001. *** 2000. Note: years of reference were chosen according to the availability of data at both the Hungarian and the European levels. Source: Energy Prices and Taxes, IEA/OECD Paris, First Quarter 2002.

Regulated electricity prices are capped. The first four-year cycle of price regulation for electric and heat energy was completed at the end of 2000. Effective from 1 January 2001 under Ministerial Decree 45/2000(XII.21)GM, the main guidelines of the new electricity price mechanism correspond to the principles of the previous system. The wholesale prices were defined on the basis of justified costs. The price formulas are designed to maintain the average prices drafted on several levels of the marketing chain (power plants, wholesalers and distribution companies). These price formulas are published several years prior to implementation and contain parameters that are partly measured by statistics, partly calculated on public data produced by the MEH, and partly defined under a price authority decision by the Ministry of Economy and Transport (see Chapter 8 for a more detailed explanation of the price formulas). The Ministerial Decree 59/1995(XI.14)IKIM describing the first natural gas price regulation system was effective until 31 December 2001. The MEH began to elaborate a new four-year price regulation system at the beginning of 2001. The new pricing system could be introduced during 2003. Meanwhile, the old system has been prolonged (see Chapter 7, p. 89).

30

Real electricity prices increased to the extent that they are now covering costs. The same is not true for gas prices. Even though real gas prices also grew in the past decade, they are yet to cover costs, and have generated losses for MOL and a number of distortions in the energy sector that are described further in the following chapters. In 2002, the state-owned MVM group announced that the 5% growth cap on retail electricity prices imposed by the government in January 2002 will result in a loss of HUF 42 billion (approximately US$ 190 million), which represents 10% of MVM’s annual revenues 7. Similarly, MOL stated publicly that they lost US$ 800 million over the period 2000 to 2001 as a result of government caps on gas prices. There are two levels of value-added tax (VAT) in Hungary: ●

12% on the price of household products (electricity, gas and heat supply, propane-butane for non-fuel purposes, firewood, charcoal, mineral fuels, solar energy collectors), which are considered prime necessities.

●

25% on liquid fuels 8.

Hungary also has two levels of mining taxes for domestic energy production: ●

12% for crude oil and natural gas.

●

2% for hard coal and lignite.

Excise duties on liquid fuels, which have recently been increased, are an important source of revenue for the State. The rates are as follows: Table 3 Excise Duty Levels for Liquid Fuels Fuel

Gasoline (95 octane)

Excise duty from 1 January 2000 onward

Excise duty from 1 July 2002 onward

HUF 93 / l

HUF 103.5 / l

Gas oil, fuel oil

HUF 80.2 / l

HUF 85.0 / l

Propane-butane

HUF 43 / kg

HUF 47.9 / kg

Generally speaking, apart from a few exceptions discussed later in this review, tax levels on energy products in Hungary are similar to those practised in many other European countries. 7. A loss of HUF 74 billion (approximately US$ 330 million) in 1999 to 2000. 8. Biodiesel is exempted from tax (VAT and excise duty).

31

CRITIQUE The aim of Hungary’s energy policy is to strike a balance between energy security, economic efficiency and environmental protection, in line with the IEA Shared Goals (see Annex B). Since the last In-depth Review, Hungary has continued its remarkable progress in energy market liberalisation. It set the conditions for an electricity market to emerge on similar grounds to those in other European countries, and paved the way for the emergence of a natural gas market. The government deserves full credit for its determination to pursue reforms. A strong driving force in energy policy has clearly been the need to conform to the acquis communautaire with the perspective of EU accession. Compliance with this acquis communautaire is also a step towards a more efficient energy system. Even after full compliance, Hungary will need to address energy policy challenges to maintain supply security, cost-efficiency and environmental mitigation. As in many other transition countries, Hungary’s energy policy focused for a long time on the expansion of energy supply while paying little attention to costs and economic efficiency (see Chapter 4). However, during the past decade the government has increased its emphasis on the demand side. The effectiveness of its energy efficiency policies will be discussed in the next chapter. While the government is beginning to put more emphasis on market mechanisms as guiding principles in policy choices, its primary focus remains largely on the supply side, i.e. securing supply, introducing competition in the energy markets and diversifying energy sources. Continued emphasis on the energy demand side is indispensable. Final energy consumption has been quite stagnant in past years, largely owing to the economic restructuring in which several energy-intensive industries have shrunk and less energyintensive industries have emerged and grown. However, economic restructuring is likely to slow down, which will lead to an increase in final energy consumption, following the gradual growth of GDP per capita. In order to reach its energy policy goals the government will need to pay more attention to energy demand-side measures. Full and rapid liberalisation would entail a significant readjustment of prices. Although electricity and gas prices in the industrial sector are similar to those observed in other IEA member countries with relatively open markets, Hungarian households pay far less, which reveals possible price distortion, cross-subsidisation or direct price subsidy. The new legislation has increased the independence of the MEH but left the key pricing decisions for noneligible consumers (i.e. those who do not have the right to choose their supplier) with the government. The Ministry of Economy and Transport continued to play a decisive role in the price-setting decisions that are dominated by social considerations. The authorities justified the artificially low prices in the household sector by the need to protect the real income of

32

the population and to restrain the overall level of consumer price inflation. This is particularly true for natural gas prices. However, this policy has various harmful effects. First, it distorts fuel choice, and, for example, artificially boosts natural gas demand by household. Second, it undermines energy conservation by weakening incentives for the efficient use of energy, it encourages energy wasting and increases energy demand, with implications for energy security and environmental policies. Third, low prices discourage investment by domestic energy firms such as MVM and MOL (sometimes pushed to incur losses), thereby exacerbating a harmful impact on security of supply. To avoid uncertainties the government must provide a clear timetable setting milestones for price increases to market levels for gas and electricity. To prevent possible conflicts of interest, since the government owns capital in energy firms and has a political interest in price levels, full responsibilities should be given to the MEH, not only to calculate prices but also to set them (when the government has set the milestones). Social hardship should be addressed through social policy measures, not through energy prices. Since the last In-depth Review, progress on energy market reforms has been both significant and positive. Competition is gradually increasing. Major tasks should be carried out by the MEH and the Ministry of Economy and Transport to enable markets to function smoothly in the future. While the level of staffing of the MEH has increased to face the new regulatory challenges, the volume of staff of the Directorate-General for Energy has been reduced. This is logical since a number of the new tasks relate to the functioning of markets and are performed by regulatory authorities. However, the main task of elaborating an energy policy and implementing it remains largely unabated and the Directorate-General for Energy seems to be insufficiently staffed to deal with this issue. The Hungarian economy and policy-making process benefits from strong independent bodies to represent consumer interests. These bodies have an important contribution to ensuring the continued development and success of the energy market liberalisation programme. However, it is important that they represent all consumers, not only specific groups such as energyconsuming industries. Energy supply in Hungary suffers from recurring problems of quality and losses. The government acknowledges the problem, realising that a significant part of these losses are not technical but rather due to electricity pilferage. A number of measures need to be taken beyond prices to correct this trend. The government should envisage stronger measures against electricity pilferage (both detection and sanctions). Significant variations in pressure and composition of the natural gas being supplied to end-users are also a cause for concern. Price liberalisation will go a long way towards

33

facilitating investments to improve quality. The government should also fix targets to improve quality and reduce losses, with clear indicators to monitor the progress and feed back into the policy and regulatory framework to take into account progress in energy prices and taxes.

RECOMMENDATIONS The government of Hungary should: ◗

Establish an indicative timetable for price increases to market levels for gas and electricity for non-eligible consumers.

◗

Address social hardship through social policy measures, not through energy prices.

◗

Establish a timetable for handing price control responsibilities to the MEH.

◗

Ensure that the Directorate-General for Energy is adequately staffed and has sufficient resources to administer the energy market liberalisation process.

◗

Organise, in a transparent fashion, the contributions of the different representative bodies of consumers of the network industries (electricity, gas, district heating) to avoid any risk that certain groups of consumers would have a favoured position in influencing government policy.

◗

Define a timetable to improve energy quality and reduce technical and nontechnical losses.

◗

Devise indicators for monitoring the quality of energy supply (electricity, gas), in co-operation with all the energy stakeholders.

◗

Design and implement a system of improved measures (detection and sanctions or penalties) against electricity pilferage.

34

ENERGY EFFICIENCY ENERGY DEMAND Aggregate energy demand remained unchanged since the 1999 In-depth Review. It grew at an average rate of 0.2% between 1995 and 2000. TFC increased only slightly in 2000, while GDP grew by around 3.6% per annum between 1995 and 2000. In 2001 and 2002, GDP growth is expected to be lower. Hungary’s energy intensity, measured as TPES per unit of GDP, declined in the same order of magnitude, at a rate of 2% per annum between 1990 and 2000. The principal fuels in final consumption are natural gas (39% of TFC in 2000) and oil products (32% of TFC in 2000). The share of other fuels is lower, namely electricity (15%), heat (8%) and coal (4%). During the past decade, the accelerated replacement of capital stock, fuel switching and efficiency gains, especially in industry, facilitated a clear decoupling between energy supply and economic growth in Hungary. In the last two years the increase in TPES has been slower than that of TFC, probably because of the implementation of improved energy conversion equipment, with the use of gas for power generation and factors such as the gradual shift to electrical equipment in industrial processes 9. The sectoral trends behind TFC changes explain the stagnation in TFC that has occurred in recent years. Industry energy consumption marginally decreased after 1995 (–0.5% per annum on average between 1995 and 2000). A similar trend is observed in residential energy consumption (–1.7%) where energy efficiency is improving in buildings and in district heating 10. The sectors driving energy consumption are transport (3.9% annual growth between 1995 and 2000) and commercial (3.7%). Fuel switching has positively affected final electricity consumption (1.1% growth per annum on average between 1995 and 2000) and final natural gas consumption (2.4%). However, it has negatively affected the demand for petroleum products (–0.4%) and coal (–10.4%).

9. The shift towards electricity in final energy consumption facilitates the use and efficiency of electricity in industrial processes and air-conditioning. This affects specific sub-sectors, namely chemical and petrochemical (4.6% growth in final consumption of electricity between 1995 and 2000), non-metallic minerals (9.0%), commercial and public services (4.2%). 10. In Hungary, more than half of the building stock was built during the communist era, when the priority was to produce a large quantity of cheap buildings to accommodate households with no strong emphasis on energy efficiency. A similar remark applies to district heating systems.

35

4

Figure 5 Total Primary Energy Supply and Total Final Consumption, 1990 to 2000 30 Total Primary Energy Supply

Total Final Consumption

25

Mtoe

20

15 1990 1991

1992 1993 1994

1995 1996 1997 1998

1999 2000

Source: Energy Balances of OECD Countries, IEA/OECD Paris, 2002.

Figure 6 Total Primary Energy Supply and Gross Domestic Product, 1990 to 2001 140

28

120

27

100

26

80

25

60

24

40

23

20

0 22 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Total Primary Energy Supply

Billion US$ at 1995 prices and PPPs

Mtoe

29

GDP (PPP)

Sources: Energy Balances of OECD Countries, IEA/OECD Paris, 2002; and National Accounts of OECD Countries, OECD Paris, 2002.

36

Figure 7 Energy Intensity in Hungary and in Other Selected IEA Countries, 1973 to 2010 (toe per thousand US$ at 1995 prices and purchasing power parities) 0.5 Czech Republic 0.4 Hungary 0.3

IEA Europe*

0.2

Austria

0.1

0

Portugal

1975

1980

1985

1990

1995

2000

2005

2010

* excluding Norway from 2001 to 2010. Sources: Energy Balances of OECD Countries, IEA/OECD Paris, 2002; National Accounts of OECD Countries, OECD Paris, 2002; and country submissions.

ENERGY EFFICIENCY POLICIES Hungary has a large energy efficiency potential. Domestic and external resources have been used to rapidly catch up with the best international practices and as a means to accelerate the acquisition of more energy-efficient equipment. On the basis of the 1999 “Hungarian Energy Policy Principles and the Business Model of the Energy Sector” and related policy decisions, the government adopted the new Energy Conservation and Energy Efficiency Improvement Action Programme (Decision 1107/1999) that began in 2000 and is to run for ten years. The Action Programme is part of the Széchenyi Plan, a broad effort to fund modernisation of the Hungarian economy launched in 2000. It also includes initiatives related to renewables. The Action Programme lists 15 sectors and areas for financial support. It targets a 7% to 8% reduction in energy consumption per annum (approximately 1.8 Mtoe) until 2010 in these sectors and areas. The Action Programme has an annual budget of HUF 1 billion (approximately US$ 4.5 million). In 2000, measured in terms of TFC savings, the programme

37

was thought to be successful, and the government increased its annual budget to HUF 5 billion in 2001 (approximately US$ 22 million). To facilitate the administration of this programme, two pre-existing organisations, the Energy Centre and the Energy Information Agency, were merged. The Energy Centre 11 is a non-profit company, with a staff of approximately 50 12. Its capital is owned by the founders as follow: Ministry of Economy and Transport 60%; Ministry for Environmental Protection 25%; Hungarian Energy Office 15%. The Energy Centre has the following principal functions: ●

To administer the implementation of the Action Programme by presenting a short list of applicants to an inter-ministerial committee on energy efficiency (established in 1999).

●

To manage the implementation of international energy efficiency projects using multilateral or European funding (UNDP/GEF energy programme for municipalities, EU PHARE programme).

●

To produce energy information and statistics.

It is estimated that HUF 200 billion (approximately US$ 820 million) is needed to finance the Energy Conservation and Energy Efficiency Improvement Action Programme, of which HUF 50 billion (approximately US$ 220 million) will come from the State. Support for the residential sector mainly involves grants of up to 30% on new and additional investments. Other sectors are offered a variety of measures ranging from loans with favourable interest rates to full grants. Hungary is also implementing the following energy efficiency policies and programmes: ●

The UNDP/GEF Public Sector Efficiency Programme to remove barriers to improved energy efficiency in the public sector.

●

The IFC/GEF Efficient Lighting Initiative (ELI) to promote energy-efficient lighting.

●

The German Coal Aid Revolving Fund (GCARF) to provide finance to the private sector to support energy efficiency investments and reduce environmental pollution.

●

The EU PHARE Revolving Fund (PRF) to provide soft-loan credit facilities to municipalities, private and municipality-owned companies.

11. Also subtitled Energy Efficiency, Environment and Energy Information Agency. 12. The staff number is higher since some are working only part-time, being seconded.

38

Table 4

Communal

SZT-EN-2

Local government

SZT-EN-3

Public lighting

Saving in economy costs (million HUF/annum)*

Value of project (million HUF)

SZT-EN-1

Amount of support (million HUF)

Name of programme

Total number of supported applications

Programme code

Expected energy saving TJ/annum

2001 Objectives and Results of Energy-saving Programmes within the Széchenyi Plan

3 987

1 213.015

4 475.4

143.0

97

344.709

1 180.5

97.0

138

116

411.876

1 389.0

116.0

289

156

SZT-EN-4

District heating

38

1 047.669

4 135.1

999.0

1 121

SZT-EN-5

Renewable

231

390.860

1 863.8

226.0

214

SZT-EN-6

Approach

14

42.598

63.8

0.0

0

SZT-EN-7

Production company audit

34

128.810

200.5

0.0

0

SZT-EN-8

Local government audit

59

111.690

222.3

0.0

0

SZT-EN-9

Transport

4

11.975

16.9

0.0

0

SZT-EN-10

SMEs, energysaving project

34

120.604

432.2

73.8

99

4 614

3 823.806

13 979.5

1 654.8

2 017

Total * HUF 1 = US$ 0.004

●

The Hungarian Pilot Panel Programme to provide grants for improving thermal insulation of buildings.

●

The Hungarian Energy Saving Credit Programme (HESCP), now merged in the Széchenyi Plan, to provide non-refundable subsidies of up to 30% for the modernisation of energy use in municipality-owned institutions.

●

The Hungarian Energy Efficiency Co-financing Programme (HEECP) funded by the International Finance Corporation to offer partial guarantee support for credits provided by financial institutions for energy efficiency projects.

●

The Supporting the Co-operative Organisation of Rational Energy Use Programme (SCORE) funded by the Netherlands Agency for Energy and Environment to support the development of energy efficiency institutions and networks and demonstration projects.

39

Figure 8 Energy Intensity in Hungary and in Other Selected IEA Countries, 1973 to 2020 25

Oil

20

Gas 15 Other* Coal

10

Heat

Mtoe

5

Electricity

0 1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

* includes geothermal and combustible renewables and wastes. Sources: Energy Balances of OECD Countries, IEA/OECD Paris, 2002; and country submission.

Figure 9 Total Final Consumption by Sector, 1973 to 2020 25

20 Industry 15 Residential Transport

10

Other*

Mtoe

5

0 1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

* includes commercial, public service and agricultural sectors. Sources: Energy Balances of OECD Countries, IEA/OECD Paris, 2002; and country submission.

40

Figure 10 Total Final Consumption by Sector and by Source, 1973 to 2020 Industry Sector 12

Oil 10

Gas 8

Renewables 6

Coal 4

Heat Mtoe

2

Electricity 0 1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

Residential/Commercial Sector 12

Oil 10

Gas 8

Other* 6

Coal 4

Heat Mtoe

2

Electricity 0 1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

Transport Sector 5

4

3

Oil

2

Electricity

Mtoe

1

0 1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

* includes geothermal, combustible renewables and wastes. Sources: Energy Balances of OECD Countries, IEA/OECD Paris, 2002; and country submission.

41

RESIDENTIAL AND COMMERCIAL SECTOR A large share of Hungary’s building stock is old and badly insulated. Final energy consumption in the household sector considerably decreased as a consequence of important price increases between 1992 and 1998, and stabilised thereafter given smaller increases in real energy prices of electricity and gas. The following energy efficiency measures have already been adopted: Energy Efficiency Standards Until 2002, most of Hungary’s energy efficiency standards were obsolete. To comply with EU regulations, the Ministry of Economy and Transport issued three new Ministerial decrees in February 2002 on energy efficiency labelling of dish-washers, household combined washer-dryers and household electric refrigerators, freezers and their combinations. Building Codes The Hungarian Insulation Standard MSZ 04-110-2-191, which regulates the thermal insulation of new residential buildings, has been in force since 1992. Although it conforms to the strictest EU standards, enforcement and quality control in buildings are still lacking. Retrofitting To modernise the large number of poorly insulated housing blocks, Hungary launched a reconstruction programme (the SZT-EN-1 Programme), within the Széchenyi Plan. A non-reimbursable grant is provided for people wishing to make energy efficiency investments in their homes, such as heating reconstruction, additional insulation and replacement of windows and doors representing HUF 60 000 (approximately US$ 300) per apartment. In 2001, the Energy Centre supported 3 842 applications; the total grants amounted to HUF 1.15 billion (approximately US$ 5 million) and may reach about HUF 3 billion (approximately US$ 13 million) in 2002. The SZT-LA 2 Programme offers non-refundable grants to finance energy-efficient renovations in residential buildings made with prefabricated technology and retrofitting of company buildings with industrial technology (block houses). Total grants amounted to HUF 2 billion (approximately US$ 8.5 million) in 2001. Information/Education/Public Awareness During the 1990s, the awareness activities launched by the central administration diminished. The Energy Conservation and Energy Efficiency Improvement Action Programme stressed the need to strengthen information on energy savings in the education system, to support advisory networks and

42

consumers offices and to increase publicity to encourage consumers to save energy. In 2002, in the framework of the Széchenyi Plan, a public awareness programme was implemented and directed mainly towards the education sector. Non-governmental organisations (NGOs) have played an important role in this area. The Energy Efficiency Advisory Network launched by environmental NGOs, the Enterprise Development Fund (MVA) and the Hungarian Alliance of Technical and Science Association (MTESZ) form a group of around twenty Regional Energy Advice Centres disseminated throughout Hungary. To develop these energy advice centres, Hungary benefited from funds channelled through the EU PHARE programme and the Dutch energy agency, NOVEM.

DISTRICT HEATING AND COMBINED HEAT AND POWER DISTRICT HEATING Hungary has a long experience in district heating 13, which was developed in a large and systematic fashion in the 1960s to coincide with major housing construction programmes. In 2000, the country had 142 district heating companies, which operated 240 systems in 109 towns and cities. These companies supplied some 644 000 dwellings or about 16% of the approximate four million households in Hungary. Natural gas accounts for 66% of the fuel used for district heating, while coal and oil account for 19% and 11% respectively and renewable energy sources, waste and other fuels represent 4%. For a long time, district heating companies received significant amounts of financial support from the central government, through a 30% to 40% subsidy to end-user prices. These subsidies were abolished in 1991. The issue of strong regional price discrepancies and remaining amounts of crosssubsidies led to the institution of a uniform, national regulatory framework for district heating: the District Heating Law that was adopted by the Hungarian Parliament in March 1998 14. Before that, the ownership of district heating companies was handed over to the municipalities through the Municipality Act. The 1998 District Heating Law and the Law on Concessions allows restricted privatisation of up to 49% of the capital, while maintaining the majority of the shares in the ownership of the municipality. A private concession for the operation of the district heating system is also permitted, if

13. In 1896, the Hungarian Parliament was the first building to be equipped with a heating system based on district heat. 14. The District Heating Law defined rules and responsibilities in district heating; however, it could not solve the problem of cross-financing.

43

100% of the capital remains in the hands of the municipalities. Responsibility for municipal district heating, including the setting and control of end-user prices, was also transferred to municipalities in 1998, through the District Heating Law. The Ministry of Economy and Transport exercises the power to set prices for heat supplied by power plants over 50 MW. Price determination and district heating licensing are the responsibility of the MEH insofar as it involves an electricity production capacity of 50 MW or more 15. District heating companies operating under the authority of municipalities must purchase heat at artificially high official prices while their tariffs for selling heat to their customers are kept low for social and political considerations and in the context of strong competition from natural gas suppliers in the residential sector. Gas prices are official prices set by the Ministry of Economy and Transport, which have also been kept artificially low (see Chapter 7). The 1993 resolution on energy policy and the 1999 document entitled “Hungarian Energy Policy Principles and the Business Model of the Energy Sector” state that it is necessary to improve the district heating system, to modernise it and to make it competitive. Despite the generally good technical condition of district heating systems in Hungary on the supplier side, there is still a need for a large refurbishment of the end-user district heating distribution networks. Complete reorganisation of the network involves various actions, which will pave the way for a more technically advanced and economical service, such as: ●

Renovation and modernisation of heat generating plants.

●

Reconstruction of district heating supply systems (pipelines and heat centres).

●

Provision by local governments owning the systems to create competition between district heating operators and to remove the current monopolies.

The 1999 document indicates that the current environmental regulations must be modified to better exploit the environmental advantages of district heating systems. The Energy Conservation and Energy Efficiency Improvement Action Programme’s action No. 15 considers reconstruction of the district heating system a high priority; the objective being to save 10 PJ of energy per annum until 2010. In 2001, modernisation of the district heating systems benefited from a total US$ 19 million on the supplier and consumer sides in the form of non-reimbursable direct capital support, based on the government’s Széchenyi Plan. The maximum subsidy represented 30% of the investment cost. The

15. The 2001 Electricity Act raised the limit from 20 MW to 50 MW.

44

government has now changed its support to preferential credits. Other funds for improving the existing district heating system include the Environment Protection Fund and the German Coal Aid Revolving Fund (GCARF).

COMBINED HEAT AND POWER (CHP) Total CHP capacity in 1999 amounted to 873 MW. CHP produced 4.8 TWh of electricity and 46 PJ of heat in 2000 16. According to Ministerial Decree 55/1996, both the then electricity transmission company (MVM), today MAVIR, and the electricity distribution companies are required to purchase electricity produced from renewable sources and smallscale CHP (from 0.5 MW up to 20 MW) at guaranteed prices. Under the 2001 Electricity Law (to enter into force in 2003), mandatory purchasing will be enforced with guaranteed prices from 0.5 MW up to 50 MW (up to only 5 MW for industrial CHP and hydropower), and with market prices above the given limits. Since 1 January 2001, electricity and heat purchase prices are very attractive (between HUF 14 and HUF 15/kWh). Future electricity and heat prices will be regulated by the MEH, unless heat is produced by power plants below 50 MW, in which case the municipalities set the prices (see Chapter 8, section on electricity prices).

INDUSTRY A large part of the energy-intensive industries, namely iron and steel, aluminium metallurgy, heavy chemical industry, mining, etc., went bankrupt during the transition from a centrally planned to a market economy. After this period, the modernisation of these industries and the spectacular development of non-energy-intensive industries, such as the car industry, electronics, telecommunications, precision engineering, etc., resulted in a decrease in the final energy intensity of manufacturing. The main energy efficiency measures for industry comprise the following: Energy Audits Within the framework of the Széchenyi Plan, non-refundable grants are provided for energy audits in companies with energy costs of HUF 30 million per annum or higher (approximately US$ 130 000). In 2001, 29 company audits received a total amount of HUF 110 million financial support (approximately

16. According to the Hungarian District Heating Association (MATÁSZSZ), cogeneration resulted in approximately 20 PJ (5.6 TWh) energy saving and the avoidance of 1 Mt of CO2 emissions in 1999, out of which approximately 90% is district heating related.

45

US$ 450 000). In 2002, the support amounted to 50% of the total audit (maximum amount per application: HUF 5 million, or US$ 20 000). Energy Services Companies (ESCOs) Seven ESCOs are operating in Hungary; they focus on heating projects, in particular gas-fired boiler plants and, to a lesser extent, public lighting and thermal insulation. Hungary has been one of the leading countries to develop the scope of ESCOs in the 1990s, with the assistance of international funding agencies or international banks (European Bank for Reconstruction and Development, International Finance Corporation). The Hungarian Energy Efficiency Co-financing Programme (HEECP) and the Global Environmental Facility (GEF) programmes facilitate the establishment of ESCOs and maintain the stable economic conditions for their development.

TRANSPORT Although transport’s share in TFC increased from 15.7% in 1990 to 19% in 2000 and is expected to reach 21% by 2010, it is still lower than the 2000 IEA average of 34%. However, transport’s share in TFC is growing in Hungary at a rate that is three times higher than the IEA average. A wide range of commendable measures has already been implemented to limit increased road traffic use by private passengers and freight, namely high excise taxes on fuels; differentiated taxation on the purchase, import and use of cars and trucks to encourage turnover in road vehicle stock; and investments in rail and public transport systems. However, the modal split of transport has shifted strongly towards passenger car road transport at the expense of the decreasing share of rail, inland waterways and public transport in the 1990s. This is due to the continued increase of per capita income, the expansion of the national motorways network and the renewal and maintenance of the state-owned road networks. In addition, income tax credits for commuting by passenger cars and corporate tax credits for company-owned vehicles have been encouraging unnecessary use of passenger cars. The Energy Conservation and Energy Efficiency Improvement Action Programme includes several measures to fund energy-saving measures in the transport sector, offering in particular preferential credits to investors improving the infrastructure, or facilitating education programmes on energy saving.

MONITORING AND ASSESSMENT Monitoring the efficiency of the programmes and measures requires the installation and operation of an appropriate measurement and control

46

network. A biannual assessment report on the Energy Conservation and Energy Efficiency Improvement Action Programme is provided by the Energy Centre to the Ministry of Economy and Transport and reported to the government. A conceptual plan and the related action plan for developing a national measurement network have been prepared and will be elaborated in the framework of the EU SAVE Energy Efficiency Programme.

CRITIQUE Hungary’s experience in implementing energy efficiency measures is limited, given that the Hungarian authorities’ interest in energy efficiency only began at the end of the communist regime. However, Hungary’s impressive number of energy efficiency policies and programmes should enable it to rapidly catch up with best international practices. In this context, it is commendable that energy efficiency policies were regarded a high priority area in the 1999 document “Hungarian Energy Policy Principles and the Business Model of the Energy Sector” and in the new Energy Conservation and Energy Efficiency Improvement Action Programme. The creation of a new Energy Centre, merging the former Energy Centre and the Energy Information Agency, is a positive step to implement the Energy Conservation and Energy Efficiency Improvement Action Programme in a most cost-effective manner. In designing and implementing an overall energy efficiency policy, Hungary can greatly benefit from expertise and funding from neighbouring European countries, the European Commission and international financial institutions. Given the multitude of international collaboration programmes, some overlap and duplication of effort may occur. The government has a role in streamlining and co-ordinating all these programmes. The management of so many programmes with different targets is challenging, and must therefore be very efficiently and effectively co-ordinated in order to reach the desired outcome. The co-ordination that is carried out on an ad hoc basis would benefit from being strengthened and systematised. It is commendable that Hungary is adopting energy efficiency standards for household appliances on the models stipulated in the EU regulations. This action must be vigorously pursued as it will impede low-priced energyinefficient mass products to enter the consumer market. It is also commendable that Hungary has adopted thermal insulation standards in line with the strictest EU standards, but the problem is how to implement them. According to the Hungarian authorities, these standards have not been effectively implemented. It appears necessary to monitor their implementation through well-trained architects or specialised building engineers. The poor quality of building materials used in most of the housing blocks built during

47

the centrally planned regime is the source of a considerable waste of energy and lack of comfort for thousands of people living in such conditions. There is an urgent need for the government to retrofit all its energy-inefficient buildings through a long-term and well-structured programme supported by sufficient investment. Modernising district heating systems is a high priority under the Energy Conservation and Energy Efficiency Improvement Action Programme in order to save 10 PJ by 2010. District heating system owners’ revenues from heat sales should be sufficient to allow renovation and investment in the networks. However, this is not the case where district heating systems owned by municipalities supply heat to their own municipalities and the prices for heat are set for social and political purposes rather than based on economic parameters. While there are programmes to promote energy audits and sufficient audit companies with a reliable level of expertise, it appears that energy audits in industry are not adequately developed. They do not focus on small and medium-sized enterprises; more attention needs to be paid to these enterprises given their important number. It is also essential to promote ESCOs with a view to accelerating energy-saving measures, especially at a time when energy prices are likely to increase as a result of the gradual elimination of electricity and natural gas price subsidies. Energy efficiency programmes in transport are funded on an annual basis, which prevents any long-term strategy. A change in this mechanism is a prerequisite for effective action. It is difficult to know the exact level of funding allocated for improving energy efficiency in this sector. There is an urgent need to adopt a comprehensive and long-term transport policy to streamline and eventually strengthen the various energy efficiency measures and plans already implemented. Solutions could involve refining the fuel duty differential to facilitate the diffusion of lower sulphur diesel fuels or less emitting alternative fuels. The vehicle tax regime could also be based on energy efficiency and emissions levels. Additionally, there is scope for following up more rapidly transport technology initiatives taken by the EU, in particular on the R&D side. More could also be done on the investment side to boost investments in urban public transport. Most of the energy efficiency measures and programmes have only recently been implemented. It is too early to say whether all of them are well designed or adequately adapted to specific situations. Monitoring the costeffectiveness of the programmes on a regular basis as well as evaluating their impact on energy and the environment are of paramount importance. It will allow the government to adopt additional measures where increased efforts should be made, notably in the residential, commercial and transport sectors.

48

RECOMMENDATIONS The government of Hungary should: ◗

Continue to strengthen the close co-ordination among all energy efficiency plans involving national, European and international institutions to make optimal use of such expertise and funding.

◗

Provide the Energy Centre with an adequate budget, staff and executive powers to allow it to fulfil its tasks at both national and international levels.

◗

Investigate through the MEH and the Hungarian Competition Office whether heat prices are being set on a reasonable cost-reflective basis and, if not, devise and implement an appropriate solution to avoid price distortions between heat and power that would negatively affect investment in and modernisation of CHP and district heating systems.

◗

Give priority to strengthening energy efficiency in the building sector through the implementation of EU regulations on energy efficiency standards in the household sector, improve and enforce the mandatory thermal insulation standards and strengthen the programme for retrofitting the energy-inefficient housing stock.

◗

Strengthen energy audits in industry (including small and medium-sized enterprises), and measures to encourage the audited enterprises to implement recommended cost-effective measures.

◗

Establish and implement a comprehensive long-term energy efficiency Transport Plan with clear objectives supported by adequate cost-effective measures and investments funded over the long term to limit the growth of road transport. Include measures to stimulate investment in public transport, on driver behaviour (car labelling for example) and on the diffusion of cleaner fuels and low-emission vehicles.

◗

Strengthen the appropriate measures and capacities to carefully monitor and assess all the energy efficiency programmes and measures, and adjust them according to the changing economic context.

49

ENERGY AND THE ENVIRONMENT CLIMATE CHANGE Hungary ratified to the Kyoto Protocol on 21 August 2002 and committed to reduce its emissions of all six GHGs by 6% between 2008 and 2012 from a 1985 to 1987 baseline. As an economy in transition, Hungary was free to choose that baseline, which marked the country’s highest level of energy consumption. Following the decrease in GDP encountered during Hungary’s transition to a market economy, Hungary’s CO2 emissions decreased at an annual rate of 2.2% between 1990 and 2000, to reach 55 Mt of CO2 in 2000, against 71 Mt in 1990 17. Compared to 1990, CO2 emissions were 22% lower in 2000. The government projects CO2 emissions to remain at the 2002 level in 2005, and reach 59 Mt in 2010 and 64 Mt by 2020. Accession to the EU has been a leading driver in Hungary’s efforts to mitigate GHG emissions. Figure 11 Energy-related CO2 Emissions per GDP in Hungary and in Other Selected IEA Countries, 1973 to 2010 (CO2 emissions/GDP using 1995 prices and purchasing power parities) 1.70 Czech Republic 1.50 1.30

Hungary

1.10 IEA Europe* 0.90 0.70

Austria

0.50 Portugal 0.30 0.10 1975

1980

1985

1990

1995

2000

2005

2010

* excluding Norway from 2001 to 2010. Sources: Energy Balances of OECD Countries, IEA/OECD Paris, 2002; National Accounts of OECD Countries, OECD Paris, 2002; and country submissions. 17. Assessed using the Intergovernmental Panel on Climate Change Tier 1 Sectoral Approach.

51

5

Figure 12 CO2 Emissions by Fuel*, 1973 to 2000 100

80

Gas

60

Million tonnes of CO2

Oil 40

Coal

20

0 1975

1980

1985

1990

1995

2000

* estimated using the IPPC Sectoral Approach. Source: CO2 Emissions from Fuel Combustion, IEA/OECD Paris, 2002.

Figure 13 CO2 Emissions by Sector*, 1973 to 2000 100 Other 80

Million tonnes of CO2

Residential 60

Transport

40

Manuf. ind. and construction Other energy industries

20

Public elec. and heat

0 1975

1980

1985

1990

1995

* estimated using the IPPC Sectoral Approach. Source: CO2 Emissions from Fuel Combustion, IEA/OECD Paris, 2002.

52

2000

In 2000, the relevant government authorities developed a strategic dual objective approach to climate change mitigation policies (Government Decision No. 2206/2000). On the one hand it defines governmental and non-governmental tasks in light of preparations for accession to the EU, and on the other, it provides a general planning and conceptual framework until 2012. In particular, the strategy aims to achieve the following: ●

Meet the Kyoto commitment entirely through domestic measures.

●

Develop and select measures through dialogue with the country’s different economic and social interest groups.

●

Support the development of an efficient GHG emissions monitoring and reporting system as well as emissions reduction projects, to minimise administrative costs of Joint Implementation (JI).

●

Use the flexibility mechanisms under the Kyoto Protocol only for additional emissions savings. A system for JI – the reduction of emissions through specific projects and the transfer of these reductions to other parties – and emissions trading is to be developed in the longer term. The government intends to carefully manage its surplus of emissions under the Kyoto Protocol to ensure the country’s compliance with its goals.

Among the strategy’s concrete goals, the government aims to increase the share of renewables in primary energy consumption to 5% to 6% in the next ten years. This target is part of the government’s Energy Conservation and Energy Efficiency Improvement Action Programme, which is detailed in the chapters on renewable energy and energy efficiency.

Table 5 Activities Implemented Jointly in Hungary Activity title

Investor

Total GHG reductions (t CO2 equivalent)

Lifetime (years)

Energy efficiency improvement by Hungarian municipalities and utilities

Netherlands 240 000

Redesign of the energy process at Bácstej Kft

Netherlands

..

France

71 420

15.0

Netherlands 148 000

20.0

Fuel switching and co-generation in the Dorog Ero”mu” Kft power plant RÁBA/IKARUS compressed natural gas engine bus project

20.0 ..

Source: United Nations Framework Convention on Climate Change.

53

Under the EU directive approved on 9 December 2002 by the Council of Environment Ministers, governments must draft national plans detailing how many allowances will be distributed to plants covered by the directive (inter alia all thermal plants above 20 MW of capacity). Once this critical and politically difficult measure has been cleared and agreed by the European Commission, these plants will need to surrender allowances equivalent to their annual emissions for two periods, namely 2005 to 2007 and 2008 to 2012. Plants will be able to buy and sell allowances to other plants in the European emissions trading system. It is not clear how the directive will apply to new member States, i.e. whether they will be granted a transition phase, or how project-based activities may be taken into account. Hungary complies with the requirements for reporting its GHG emissions to the Secretariat of the United Nations Framework Convention on Climate Change (UNFCCC), by submitting periodical national inventory reports. Hungary has used activities implemented jointly (AIJ), the precursor of JI, which were adopted in Kyoto, to develop four projects, two related to energy efficiency and two facilitating fuel switching. This experience could be used as capacity building to facilitate JI projects. Proposals have already been made for JI projects in Hungary, e.g. under the Netherlands international tender for JI projects.

AIR POLLUTION According to the Ministry of Environment and Water, 3% of Hungarian territory is considered to be polluted, while 9% only slightly polluted, with 44% of the population living in these areas. The air pollutants emitted in large quantities include SO2, NOx, CO2 and particulates that are essentially produced by the combustion of fossil fuels in power plants and transport. SO2 and particulate emissions have been decreasing steadily and significantly over the past two decades. Most of the reductions occurred in the mid-1980s and much less after 1990. The improvement in NOx emissions levels is less obvious given the increasing share of emissions from transport observed in recent years. The growth of private transport is also limiting potential for further reductions and is contributing to the stagnation of CO emissions. The drop in emissions levels was principally a consequence of fuel switching from coal to gas, the modernisation of combustion technology and general industry restructuring, with a significant number of energy-intensive industries closing down in the early 1990s following a change in political direction. The widespread use of unleaded petrol, enforcement of stricter vehicle emissions standards and the growing proportion of more recent vehicle models have helped reduce the growth of transport emissions and significantly reduced lead emissions. Nevertheless, road traffic can still be blamed for a considerable share of air pollution. It is one of the factors that

54

affects air quality in cities with significant levels of pollution such as Budapest, and significantly contributes, on a national scale, to total NOx and CO2 emissions. Table 6 Air Pollutants in Hungary, 1992 to 1998 (thousand tonnes)

SO2 NOx Particulates CO Lead* Non-methane volatile organic components

1992

1994

1996

1998

827.3 183.2 159.6 835.9 183.0 141.8

741.0 187.5 155.5 774.3 107.0 142.4

673.2 195.8 140.7 726.9 68.0 150.1

591.8 202.6 127.4 736.9 52.0 140.6

* tonnes. Source: Hungarian Ministry of Environment and Water.

Compared to other OECD countries, the balance of pollutants in Hungary reflects the country’s specific structural features. For example, SO2 emissions per capita are much larger in Hungary than in other OECD countries, mainly because of the number of old coal, often lignite, fired power plants. NOx emissions are lower per capita in Hungary than in the OECD on average, principally because car ownership is lower than in the rest of the OECD. Hungary has already taken a number of measures to mitigate local pollutant emissions, including the 1998 Regulation 22/1998(VI.26) on emissions limit values for large combustion plants. It applies to plants with thermal inputs rated equal or greater than 50 MW, and transfers the requirements of the EU 88/609/EC standards on emissions limits from power plants into Hungarian law. All existing plants concerned are required to comply by 2005, after which Hungary expects to be an EU member State. This concerns six coalfired and one oil-fired power plants. These standards are likely to impact on the energy mix, facilitate the development of natural gas use and reduce coal use in electricity production. Investments to upgrade the plants are expected to be made by the private players concerned. Investors can apply for loans or grants from the Central Environment Protection Fund. In 2002, the revenues of the Environment Protection Fund amounted to HUF 31 billion (approximately 60% from environmental product charges 18 and fines and 18. Environmental charges apply to water use, waste collection and disposal, mining (to fund landscape rehabilitation of mines being closed or environmental improvement of existing mines), changes in land use and products (batteries, tyres, etc.).

55

40% from loans reimbursement, budgetary aid and other sources, corresponding to US$ 130 million). Hungary’s first National Environmental Programme (NEP) was adopted by Parliament in 1997. The NEP covers a six-year period (1997 to 2002). Specific quantitative targets have been set for the protection of air, water and soil, the built environment (human settlements, human health), nature and landscape, as well as special environmental issues such as waste management, noise and vibration abatement and environmental safety. The NEP takes into account relevant international environmental policy action plans and programmes, such as the Environmental Action Programme for Central and Eastern Europe, the EU Fifth Action Programme and the Agenda 21. Financial assistance from the EU has so far been granted through the PHARE programme for institution building and, to a lesser extent, investment projects. Co-financing through EU grants may cover up to 75%, even 85% in some cases, of investment costs. It is being introduced through two main schemes, namely the Large Scale Infrastructure Facility (LSIF), with assistance from international banking institutions, and the Instrument for Structural Policy for Pre-Accession (ISPA). Since 1998, the NEP helped to phase out leaded gasoline, three years in advance of the 2001 target 19. A second NEP (2003 to 2008) is currently being prepared.

CRITIQUE Although Hungary has reasonable prospects of meeting its Kyoto commitments, the government is aware of the country’s significant potential for additional energy efficiency and GHG emissions reductions. It seeks to exploit this potential, partly through funding from international and domestic institutions. Compliance is not an issue today, however this may not be the case if and when emissions levels begin to grow again. A clear government position to encourage JI projects to accelerate investment in cleaner technologies and to introduce an emissions trading system would certainly help. If trends confirm Hungary’s surplus under the Kyoto Protocol, the government should consider how to use flexibility mechanisms to exploit this resource and foster further emissions reductions in the country, e.g. by

19. The Hungarian government adopted a number of EU directives related to fuel quality, such as the Council Directive 98/70/EC related to the quality of petrol and diesel fuels.

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financing projects that would not otherwise take place and put the country on a more sustainable energy path. Accession to the EU will soon bring these issues onto the government’s agenda, since the EU agreed on 9 December 2002 on a directive that imposes emissions caps on large industrial sources and establishes a tradable permit system for GHG emissions. Almost half of the Hungarian population is considered to live in slightly polluted and polluted areas. Although progress has been made to design and implement solutions to improve air quality, there are still a number of environmental problems linked to this phenomenon, such as growing emissions from transport, or the large share of emissions associated with power production. The government is aware of the situation and, overall, the existing plans and measures taken to mitigate pollution are satisfactory. Hungary’s environmental policy appears to be appropriate for the country. Transition to an open market economy resulted in much hardship for the Hungarian population for a number of years, with current per capita incomes still low for a large proportion of the population. Transition also brought significant opportunities to leapfrog to new, more efficient and less polluting technologies. However, the end of transition may also see renewed growth in energy consumption and polluting emissions with higher levels of household equipment and the recovery of industrial output. Nevertheless, Hungary appears to be in a favourable situation to gain an environmental advantage, catching up with cleaner technologies and providing incentives to curb demand for polluting technologies and goods, but such changes will only take place with proper incentives and government decisions. In order to maximise the environmental benefits of governmental policy, the government may consider improving the co-ordination between its existing emissions mitigation programmes and the different levels of their implementation, namely government, regions and municipalities. Financial support provided by the Central Environment Protection Fund is essential, but its priorities for a given set of sectors are unclear. A clearer set of priorities guiding the disbursement of the funds may be useful. Similarly, technical choices or options to improve power plants would benefit from a clear and transparent assessment of all the alternatives being offered within the context of a broad public consultation 20.

20. As an example, the legitimacy to qualify the biomass retrofit project at the Borsod power plant as a JI has been questioned by some NGOs. They question the sustainability of forest use to provide fuel to the project and the lack of efficiency in the electricity conversion process chosen.

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RECOMMENDATIONS The government of Hungary should: ◗

Establish a clear institutional framework for JI projects to facilitate access of foreign investors and minimise transaction costs. Consider whether to use the existing emissions trading surplus under the Kyoto Protocol to encourage early investment in JI projects.

◗

Consider broader participation in international emissions trading under the Kyoto Protocol and how the government can improve Hungary’s environmental performance, e.g. through financing additional projects to reduce GHG emissions.

◗

Define a timetable for joining an emissions trading regime.

◗

Maximise transparency on environmental issues to encourage public acceptance.

◗

Continue to seek improvements in local pollutant emissions levels.

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RENEWABLE ENERGY OVERVIEW Hungary has limited renewable energy potential, principally in the form of biomass and geothermal energy. In order to develop this potential, deployment mechanisms must be put in place and sufficient economic incentives made available to entrepreneurs. EU requirements and policies, including conformity with the EU renewable energy source directive, are the main drivers for renewable energy development in Hungary. The EU aims to increase renewables as a share of TPES to 12% and as share of total electricity to 22% by 2010. Individual EU countries have been allocated individual targets depending on national circumstances. Hungary, like other EU candidate countries, is in the process of agreeing a national indicative target. The fact that renewable energy may contribute to lower GHG emissions is of less interest to the Hungarian authorities than it is to other IEA countries because Hungary will have fewer difficulties in achieving its GHG emissions reduction target. The government is mainly interested in other potential benefits from renewable energy, such as: ●

Reducing external energy dependency through the exploitation of locally available energy resources.

●

Contributing to energy security through energy diversification.

●

Generating employment.

Table 7 Renewable Energy in Hungary, 2000 (TJ)

Primary Energy Supply Geothermal direct use

67

Solar thermal direct use

4 138

Industrial waste

2 662

Solid biomass Gas from biomass

39 547 59

Source: IEA.

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6

In 2000, renewable energy represented 1.6% of TPES 21. This share is very limited compared to other IEA countries, especially in Europe22 where it reached 6.7% in 2000. This share grew a little faster, by 2.1% per annum since 1990, against 1.6% for OECD Europe. A large part of renewable energy – unaccounted here – is fuel wood consumed by the residential sector in small boilers. By 2010, the government aims to increase its share of renewables in primary energy consumption to 5% to 6%. This target is part of the government’s Energy Conservation and Energy Efficiency Improvement Action Programme, which is detailed in Chapter 4. Areas of interest for the government include: ●

Biomass projects. Energy from biomass is principally derived from wood processing. Its use will increase with investments in modern wood-fired boilers and small power plants. Wood waste combustion is also considered a complement to coal in power plants, partly to increase the lifetime of old coal-fuelled power plants, and to reduce their fuel cost. Hungary is experimenting a fuel switching project at the 137 MW Borsod power plant, to retrofit it using fuel wood. Fuel wood is also used in some district heating plants. Two biodiesel plants using rapeseed (four million litres per annum capacity) and sunflowers (12 million litres per annum capacity) as raw materials are currently being built. One bioethanol plant using corn and grain already produces 65 million litres per annum.

●

Geothermal energy. Hungary has a large geothermal potential. Its water temperature gradient is sufficiently high for it to be used for heat applications. However, this has not yet been significantly developed. Around 20% of geothermal energy is currently used in agriculture for crop drying or greenhouse heating. The remainder is used elsewhere, such as spas for tourism. Geothermal heat utilisation by heat pump is also expanding in the residential sector.

●

Municipal waste. Recently, investments in sewage treatment are increasing the production of sewage sludge gas.

●

Wind energy. Two wind turbines of 600 kW and 250 kW were built in Hungary during the last five years.

The Széchenyi Plan managed by the Ministry of Economy and Transport provides support for renewable energy projects through application to a one-time grant

21. The definition of renewables does not include industrial waste, non-renewable municipal solid waste, pumped storage production or non-commercial energy sources (such as fuel wood). 22. OECD Europe.

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aid. This plan can support 30% of investments in renewable energy; however, the upper limit differs depending on the type and purpose of the project. For the year 2000, HUF 350 million (approximately US$ 1.5 million) were available for competitive applications announced in order to increase the use of any renewable sources of energy. The support is a grant that cannot exceed HUF 35 million (approximately US$ 160 000), unless justified 23. The Ministry of Environment and Water also provides a similar magnitude of support for renewable energy. To avoid duplication of public funding, the total amount of public financial support may not exceed 50% of the total costs of development, excluding any reclaimable VAT, or 65% in case of small and medium-sized undertakings. Applicants must have their own financial sources amounting to at least 25% of the total project cost. In addition to the evidence of their own financial sources, promissory notes confirming the availability of any other possible sources must be attached to the application for public support. The 2001 Electricity Act (see Chapter 8) offers the possibility for independent electricity producers using renewables with a capacity above 100 kW to access a feed-in tariff 24. This tariff is fixed up to 2010 and is the same for all renewable energy sources. It is adjusted annually with inflation. It is paid by the main electricity producer (MVM) where a power plant is connected to the transmission network, or by the local service provider if the independent producer is connected to the distribution network. Purchasing renewable electricity is mandatory. The tariff is regulated by the Ministry of Economy and Transport through a decree. Given the current cost of renewable energy projects, the tariff is not sufficient to make them fully independent of other support mechanisms. The 2001 Electricity Act also includes a reference to an intent to move towards a portfolio-based system, met by a renewable energy obligation and tradable green certificates. The details remain to be finalised. The act stipulates that this system could provide “an effective and transparent system of support to renewables (...) in harmony with the principles of energy policy”. The idea is to inform consumers of the potential environmental benefits of renewable energy and make them bear uniformly the operating costs of the support system. Renewable energy capacity would be certified by the MEH at the request of its owner or operator. In return, the latter would be allowed to issue and sell a green certificate for the quantity of electricity produced from renewable sources and waste.

23. This funding source was used for example to help finance two of Hungary’s wind turbines in 2001 (at Inota and Kulcs, which began producing 1.5 TWh per annum from 2001). 24. For 2003, the proposal – yet to be ratified at the time of writing this report – is for a feed-in tariff of HUF 24 (approximately US cents 10) per kWh for peak electricity and HUF 15 (approximately US cents 6) per kWh for non-peak electricity. CHP and large hydroelectricity capacity are not eligible.

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CRITIQUE Hungary’s renewable energy potential largely remains to be developed. Significant near-term potential resides in bioenergy resources and renewable municipal wastes for electricity and heat production, and in geothermal energy for heat. Efforts have been made to launch the exploitation of a wide range of other renewable energy applications, such as wind, passive solar, etc. In the past, Hungarian energy policy focused primarily on fossil fuels rather than renewables. This situation is changing. The government has decided to implement a variety of support mechanisms, ranging from grants to feed-in tariffs, to encourage renewable energy technologies to demonstrate their potential contribution to the energy mix. The likelihood of Hungary joining the EU is a strong incentive to expand the renewable energy sector and to study possibilities of developing tools such as green certificates. These are welcome developments. However, the current situation does have certain shortcomings. Grants and funds given on the basis of application without clear technology or market priorities may eventually support technologies that have little economic relevance to Hungary. Similarly, the use of a single feed-in tariff for renewable electricity is a double-edged sword. It might support relatively high-cost renewable energy options while generating rents for lower-cost options. The review team acknowledges Hungary’s interest to learn from the experiences that could emerge from these measures. Capacity to achieve full cost-effectiveness should remain a principal factor in developing renewable energy projects. Uncertainties regarding tariffs beyond 2010 increase commercial risk, reduce incentives for potential investors and increase the cost of capital, thereby increasing the overall project costs for projects that do go ahead. In order to reduce these risks, increased predictability over a longer period may be required. An appropriate mechanism to encourage cost reduction also needs to be integrated into the long-term support scheme. One option for addressing both these objectives would be advance commitment on a clear timetable of a gradually reducing feed-in tariff. At present, renewable energy systems are only allowed to connect to the grid using preferential rights if their capacity is superior to 100 kW, thus disqualifying small domestic renewable energy systems, which are commonly found in other European countries (such as Germany). The only requirement for Hungary to open the way for smaller systems to be connected to the grid is the implementation of technical standards for appropriate equipment to be installed, so as not to impair the operation of the grid. Hungary is already a member of the International Electrotechnical Commission (IEC) and there should be no major problems in devising arrangements to allow smaller systems to be connected to the grid. A standard portfolio with provision for green certificate energy could be another option for promoting renewable energy in a more market-based manner.

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However, this option depends upon the existence of an advanced energy market where competition prevails and a significant quantity of renewable energy capacity exists. This is not yet the case in Hungary.

RECOMMENDATIONS The government of Hungary should: ◗

Create a roadmap for renewable energy resource development, highlighting economic potential in priority technologies.

◗

Evaluate the added value of expanding technology co-operation through the IEA Implementing Agreements.

◗

Anticipate that the future level of support will gradually decline as viable technologies are identified and sustainable markets are developed.

◗

Work towards the introduction and development of market-oriented policy instruments as the mainstream for cost-effective exploitation of renewables.

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FOSSIL FUELS OIL OVERVIEW In 2000, oil represented 6.9 Mtoe, almost 28% of TPES. The volumes consumed and the share of oil in TPES have continuously decreased during the past two decades. This share is relatively low compared to other IEA countries where oil represents an average of 40% of primary energy supply. In 2001, Hungary produced 1.1 Mt of crude oil 25, or 21.2 kbd for proven oil reserves of 110 million barrels. In 2000, Hungary imported 5.5 Mt of crude oil. Hungary also traded products (1.4 Mt of imports and 2 Mt of exports in 2001) with Austria, Germany and non-OECD Europe. The principal products being traded are diesel and gasoline. Over the past decade, crude oil production has either been stable or marginally decreased, while consumption decreased slightly. In 2000, Hungary’s external oil dependence amounted to 72%, with 5.3 Mt of crude oil net imports. MOL is Hungary’s principal oil company. It was created in 1991 by the merger of nine affiliated enterprises of the Hungarian Oil and Gas Industry Board (OKGT) and privatised in 1995. It is the only company that has refineries in Hungary, namely the Duna, Tisza and Zala refineries. MOL owns and operates all crude oil and most of the oil product pipelines and storage facilities in the country. MOL has ambitions to become a leading regional oil company. The government is considering selling the remaining state-held 25% stake to a private investor. MOL is listed in the Budapest, London, Luxembourg and New York stock exchange markets. The oil products market was liberalised in 1991.

OIL DEMAND Oil and oil products consumption decreased to 6.9 Mt in 2001, from 7.7 Mt in 1998. Most of this was for the transport sector, which has regularly been increasing its share from 33% in 1990 to 42% of the total oil consumption in 2000. Industry consumed 19% of the total oil products, while the agricultural and residential sectors consumed 6% each.

25. MOL, Annual Report 2001, Budapest.

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7

Figure 14 Final Consumption of Oil by Sector, 1973 to 2020 10

8 Industry 6 Residential Transport

4

Other*

Mtoe

2

0 1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

* includes commercial, public service and agricultural sectors. Sources: Energy Balances of OECD Countries, IEA/OECD Paris, 2002; and country submission.

PRODUCTION AND EXPLORATION Since its transition from a state-controlled economy to a market economy, Hungary has become an “open” country for oil and gas exploration and production. Until 1994, MOL was the sole holder of a production and exploration licence in Hungary. The adoption of the Concession Law in 1991 and the Mining Law in June 1993 (Act XLVIII of 1993 on Mining) 26 changed this situation and established the framework for exploration and development of Hungary’s oil and gas fields. The Mining Act defines the concept of "closed area" as a specific area designated for competitive bidding 27. In 1993, there was only one bidding round in Hungary. MOL was purposely excluded, while four international companies applied for exploration and production concessions and later signed concession agreements with the Hungarian government. In 1999, the Hungarian Bureau of Mining cancelled the concept of “closed areas” because the government did not wish to

26. The 1993 Mining Law was partially inspired by similar laws existing in Norway and the United Kingdom. 27. "Closed areas" can comprise one or more areas of land where explorers and geo-experts believe that there is high potential for oil and/or gas discovery. They were classified as “closed areas” because exploration permits could only be obtained by tender.

66

organise other bidding rounds in Hungary. Following this decision, by way of a simple procedure, oil companies can apply freely and directly for exploration and production permits for any area in the country, provided its total exploration area is no larger than 3 200 sq. km 28. For both the initial bidding procedure or the more recent application for a permit, the exploration period is identical – four years – renewable once for two years. Several companies currently involved in exploration in Hungary include MOL (Hungary), Gustavson (US), POGO (US), Hungarian Horizon Energy (Hungary), Pangea (US), Geomega (US) and El Paso (US). The distribution of exploration areas is as follows: Exploration by MOL.:

34 450 km2

Exploration by foreign companies: 13 298 km2 Concession exploration area: Total:

5 505 km2 53 253 km2

In addition to its domestic exploration efforts, MOL has made several investments outside Hungary to diversify its oil sources, namely in Yemen, Pakistan and Siberia. Domestic exploration activity has been successful in recent years. New discoveries and extensions resulted in significant growth of proven reserves, from 60.9 million barrels (8.3 Mt) in 1998 to 80.6 million barrels (11.0 Mt) in 2001. This helped moderate the decline in crude oil production, which began in the mid-1980s, when crude oil production was around 40 thousand barrels a day (2 Mt per annum). The Mining Law fixes the royalty rate for hydrocarbons at a level that is negotiable in some cases, but not below 12%. The Mining Law allows free access to the oil transmission pipelines for domestically produced crude oil and natural gas. This will be sustained in the future since possible discoveries are not expected to be important. There is no immediate need to develop additional pipelines.

TRANSPORTATION AND TRADE Hungary imports crude oil through three pipelines: ●

Brotherhood I, coming from the Slovak Republic to the Duna refinery, with an annual 5 Mt capacity.

28. MOL is exempt from this restriction.

67

Figure 15 Oil and Gas Exploration Concession Areas 68 Source: Ministry of Economy and Transport.

Figure 16 Oil Infrastructure in Hungary

69

Source: MOL.

●

Brotherhood II, entering Hungary from Ukraine, which is capable of transporting 10 Mt per annum of crude oil to the Duna and Tisza refineries;

●

Adria pipeline, starting from Krk Island in Croatia and ending at the Duna refinery. Between 1991 and 1995 the Yugoslav conflict caused the Adria pipeline to be closed. Its capacity is 10 Mt per annum 29.

In addition to the pipelines for imported crude oil there are two domestic crude oil pipelines connecting the Duna and the Zala refineries. Hungary’s network of crude oil pipelines measures 848 km. MOL owns all crude oil pipelines. All crude oil, namely “Russian export blend”, is imported from Russia. All Hungarian refineries belong to MOL, which is also Hungary’s sole importer of crude oil. MOL has commercial relations with several producers and exporters so the necessary quantities come from several suppliers. The majority of Hungary’s imported crude oil is delivered through the Brotherhood II pipeline. Hungary is also a transit country. In 2001, 9.7 million barrels (1.2 Mt) of crude oil moved through the Brotherhood II, Brotherhood I and Adria pipelines, en route to Bosnia-Herzegovina, Croatia and Serbia. Third party access (TPA) is enforced on the main transit pipelines. Hungary’s 1 200 km oil products pipeline network connects the Duna refinery to the Tisza refinery and to the storage places for mineral oil products. MOL has 13 wholesale storage places, including the Duna and Tisza refineries storage facilities, connected to the oil product pipelines. All oil product pipelines, except for one pipeline running from Ukraine, are on Hungarian territory. Imports and exports of crude oil and oil products are liberalised, the only requirement being the obtention of a permit from the Authorisation Office of the Ministry of Economy and Transport. Under the 1993 Security of Stockpiling of Imported Crude Oil and Petroleum Products Act, importers are obliged to pay a contribution for stockpiling.

REFINING Since November 2001, crude oil has been exclusively processed in the Duna refinery located in Százhalombatta, which is the largest of the three Hungarian refineries. Crude oil processing was stopped at the Tisza refinery

29. The pipeline was originally intended to deliver Middle Eastern or African crude oil to Hungary, but has mainly been used for flows in the opposite direction, i.e. to export Russian crude, since it is reversible up to Sisak in Croatia.

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in Tiszaújváros in June 2001 and at the Zala refinery in Zalaegerszeg in November 2001. From that time, only flue gas desulphurisation, gasoline blending and MTBE-processing work have been carried out at the Tisza refinery and only bitumen blowing at the Zala refinery. The Duna refinery has a distillation capacity of 8.3 Mt per annum. In 2001, new sulphur recovery and hydrogen production plants and new coking units complemented the existing processing capacity. In 2001, the Duna refinery processed 7.8 Mt of crude oil, with a 94% average rate capacity factor. These two figures have remained relatively stable since 1999. Hungarian refineries were built in the 1960s and are now in the middle of their lifetime. MOL has invested significant amounts to improve productivity and product quality, and to comply with volatile organic compounds emissions standards, as well as air and water quality specifications. The quality of fuels produced in the Duna refinery complies with the EU 2005 specification on fuel quality standards. The Duna refinery also manufactures gasoline that meets the expected EU 2009 specifications, namely maximum sulphur content of 10 parts per million (ppm) and maximum aromatic content of 35%. Since 1999, heating oil has been produced with a maximum 0.2% sulphur weight content in accordance with EU regulations. From January 2003, fuel oil will be produced with a maximum sulphur weight content of 1% in accordance with EU regulations. Though the wholesale products market is liberalised, competition is limited, with MOL supplying 70% of the products. Shell and OMV 30 are two other important wholesale market operators with a share of about 9% to 10% each. In 2000, MOL acquired a strategic share of 36.2% in Slovnaft, the Slovakian oil company. This strategic partnership enabled MOL to acquire the Slovnaft refinery and a number of filling stations in Central and Eastern European countries 31, thereby putting MOL in a favourable position to produce more products.

RETAIL SUPPLY Since January 1991, the trade of crude oil products has been entirely liberalised. Soon after, competition on the retail side increased significantly, in stark contrast with the upstream and wholesale market dominated by MOL. Imported products currently represent around 20% of market demand.

30. OMV is the largest industrial company listed on the Austrian stock exchange. It is a leading oil and natural gas group operating in Central and Eastern Europe, with a US$ 7.5 billion turnover in 2001. 31. Slovak Republic: 314; Czech Republic: 40; Poland: 3; Ukraine: 2.

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Figure 17 Refineries in Central and Eastern Europe 72 Source: IEA.

International oil companies operating in Hungary source 75% to 80% of fuels sold by MOL. Products retailing is a competitive activity. Imports and exports were liberalised in 1991. An additional tax (customs clearance fee of 2% and statistical duty of 1.5%) that was in effect in the mid-1990s was slowly phased out by 1998. Retailing is subject to the excise duty law, the compulsory crude oil and mineral oil products' legal requirements for refiners on stocking, and the competition law. Ten international oil companies and numerous smaller companies operating the so-called “white” petrol stations, which sell non-branded petroleum products, are competing in the retail market. The number of these “white” petrol stations has significantly reduced with the implementation in the early 1990s of more stringent environment protection requirements and stricter product quality controls 32. The market share of “white” petrol stations decreased from 23% in 1995 to 11% by 2001. MOL, Shell and OMV are the market leaders. Table 8 Petrol Stations in Hungary, 1998 to 2000 1998

1999

2000

MOL

363

389

383

Shell

121

124

125

OMV

82

113

116

Agip

83

83

101

Aral

45

51

61

Total

58

59

60

Avanti

51

54

52

Esso

26

27

29

Conoco

31

31

33

Tamoil

10

10

11

BP* “White” stations Total

–

–

898

28

800

685

1 796

1 741

1 656

* BP sold its petrol stations to OMV after 1998. Source: Hungarian government. 32. The last In-depth Review noted a large decrease in fraudulent behaviour on the part of these “white” stations after the introduction of increased government controls following the 1992 diesel market crisis, where MOL and other players incurred major losses due to the sale in Hungary of illegal smuggled diesel.

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Figure 18 Fuel Prices, 2001 Industry Sector 900 800 700 600 500 Tax component

400 300

US$/toe

200 100 0 Electricity

Light fuel oil

High sulphur fuel oil

Low sulphur fuel oil

Gas

Diesel

Household Sector 1 000 900 800 700 600 Tax component

500 400 300

US$/toe

200 100 0

Electricity

Gas

Coal

Source: Energy Prices and Taxes, IEA/OECD Paris, 2002.

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Gasoline

In 2001, gasoline consumption reached 1.9 Mt, heating oil 0.96 Mt and fuel oil consumption 1.5 Mt. In the past, a large number of companies traded products on the wholesale market. A significant movement of concentration has taken place, following the implementation of stricter rules to apply excise duty and increased competition. The number of companies in this market segment does not exceed 35 today.

PRICING AND TAXATION In 1999 and 2000, the majority of Hungarian oil market developments were a consequence of high oil prices. Crude oil and oil products prices are set freely by the market. The government has limited influence on these prices, except for taxation. In 2001, oil prices reduced and oil demand grew again. Wholesale price changes are basically generated by modifications in the booking price and the HUF/US$ rate. Retail prices are built up by adding the retail margin, excise duty and VAT to wholesale prices. The market leader MOL’s pricing is influenced by price conditions in neighbouring countries. Oil forced out of the domestic market can only be sold outside Hungary, where prices could be lower. This tends to constrain price growth in Hungary. Fuel taxes (excise duty + VAT) are relatively high in Hungary. The possibility of a growing differential between consumer prices of road fuels in Hungary and its neighbouring countries may constitute a growing incentive for consumers to go outside Hungary to purchase diesel or gasoline. For example, since July 2002, this differential has favoured purchases in Austria. High tax levels are particularly evident for certain products, such as light fuel oil33.

EMERGENCY PREPAREDNESS Oil security is a high priority of Hungarian energy policy. Since 1995, in accordance with the 1993 Security of Stockpiling of Imported Crude Oil and Petroleum Products Act, Hungary has continuously held above 90 days of net imports based on IEA calculation methods, and established a national Crude Oil and Oil Product Stockholding Association (KKKSZ). All crude oil and oil product importers are obliged to be members of this association. The association has five projects to build 1 mcm of floating roof above ground storage for crude oil and petroleum products. This law also gives the government power to act in conformity with IEA procedures, measures and

33. In 2001, light fuel oil was taxed at 48.1% in Hungary, the highest rate among all IEA countries, except Italy with 53.7%.

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Figure 19 OECD Unleaded Gasoline Prices and Taxes, Third Quarter 2002 76 23.9% United States 40.9% Canada 53.3% Australia 46.7% New Zealand Tax 13% Mexico component 57.5% Slovak Republic 54.7% Greece 57.9% Luxembourg 63% Poland 61.9% Czech Republic 61.8% Spain 63.4% Austria 62.5% Ireland 63.5% Switzerland 67% Portugal 64.2% Hungary 66.9% Turkey 68.3% Belgium 68.9% Sweden 73.5% France 68% Italy 72.5% Germany 68.6% Finland 69% Denmark 70% Netherlands 77% United Kingdom 69.5% Norway

0

0.2

0.4

0.6

0.8 US$/litre

Note: data not available for Japan and Korea. Source: Energy Prices and Taxes, IEA/OECD Paris, 2002.

1

1.2

Figure 20 OECD Automotive Diesel Prices and Taxes, Third Quarter 2002 11.8%

New Zealand 33.1% United States 55.2% Australia 66.3% Mexico 54.8% Greece 53.1% Luxembourg

Tax component

55.8% Poland 58.3% Slovak Republic 56.1% Portugal 56.7% Spain 57.1% Austria 55.7% Czech Republic 59.8% Belgium 66.7% France 57.1% Finland 55.7% Ireland 59.6% Netherlands 61.6% Hungary 66.1% Germany 64.2% Italy 64.4% Switzerland 60.4% Denmark 56.7% Sweden 60.5% Norway

75.6% United Kingdom

0

0.2

0.4

0.6 US$/litre

77

Note: Data not available for Canada, Japan, Korea and Turkey. Source: Energy Prices and Taxes, IEA/OECD Paris, 2002.

0.8

1

1.2

decisions, including the power to draw down stocks from KKKSZ in both crisis and pre-crisis oil supply emergencies. In 2000, amendments to the abovementioned Stockpiling Security Act made it compulsory for companies involved in the emergency framework to report information on oil and oil products data to IEA and EUROSTAT.

CRITIQUE Approximately 80% of Hungary’s oil supply comes from Russia. Oil produced domestically in Hungary is trending downward. No major new oil findings are expected in Hungary, given that the country’s geology is more likely to result in gas rather than oil discoveries. The Adria pipeline is strategically very important because it can be used as an alternative for Russian oil coming in from the East, which could discourage a price increase in Russian oil. Though expectations for more domestic oil findings are limited, the Hungarian exploration policy is commendable as it generates an appropriate climate for upstream investments, producing yet another incentive for foreign investors. MOL’s efforts to diversify supply sources are also commendable, especially given Hungary’s high dependency on a single country, Russia, for its supply. Since the last In-depth Review, competition has been increasing in the Hungarian oil sector. The downstream oil sector is fully liberalised while exploration and production are shared between MOL and foreign companies. There are no restrictions on the participation of foreign companies. TPA is enforced on the main transit pipelines crossing Hungary. The 1999 In-depth Review raised the issue of pipeline access within Hungary by companies other than MOL, which is the sole owner and operator of pipelines inside Hungary. MOL argues that the pipelines should be considered an internal network of MOL, as they exclusively interconnect MOL refineries and are not interconnected with the larger pipelines. According to the government, companies other than MOL could find alternative, cheaper ways to transport their products within Hungary if required, without having to provide them with TPA on their pipelines. Moreover, the geographic size of the Hungarian market is small enough to make alternative transport options more viable. The review team judged that imposing TPA on these product pipelines is not indispensable in the present situation, although it should be monitored by the authorities to ensure that companies other than MOL do not suffer from anticompetitive discrimination in transporting their products. MOL is the only company operating refineries in Hungary. In addition, it has an increasing role in the regional supply of products with its investment in Slovnaft, which owns and operates the Slovakian refinery, and its expansion in Romania. The Hungarian market is supplied with oil products manufactured domestically or imported, the majority of imports coming from the Slovak Republic. The market is relatively small and there is increasing

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concern about a possible oligopoly over regional sources of products, in which MOL, for example, plays a major role. Continuous monitoring by the appropriate authorities is necessary. The excise duty on light fuel oil, in particular for household consumption, has been maintained at a high level, following a policy initially implemented to avoid its possible illegal use in vehicles. This is now distorting the price signal, artificially inflating demand for other heating fuels such as natural gas, which has benefited from a relatively low end-user price. The liberalisation of the oil sector and the privatisation of MOL have generated a growing need for companies to increase the confidentiality level of their operations. This is affecting the reporting requirement for information supplied by companies to governmental organisations. Despite the amendments to the Stockpiling Security Act requiring MOL to report additional information to IEA and EUROSTAT, data submission is still insufficient.

NATURAL GAS MARKET OPERATORS Distribution of manufactured gas (town gas) in Budapest began as early as the 19th century, whereas Hungary’s indigenous gas reserves were only discovered during the 1960s. Before the political change of the 1990s, the domestic gas and oil markets were dominated by the Hungarian Oil and Gas Industry Board (OKGT), established in 1957 as the fully state-owned and government-controlled successor of the private companies, which had been active in the Hungarian oil industry before nationalisation in 1948. In the mid-1960s OKGT took over gas distribution responsibilities from the municipalities, initially mainly town gas distribution. The only exception being Budapest, where FO”GÁZ (Budapest Gas Works), owned by the municipal authority, continued independent distribution and supply of gas. Subsequently, town gas was replaced by natural gas. OKGT was the umbrella organisation for 22 affiliated companies and one subsidiary, responsible for almost all parts of the oil and gas industries. The National Gas and Oil Pipeline Company (GOV) was responsible for pipeline transportation of oil and natural gas in Hungary and across borders to neighbouring countries. Five affiliated gas distribution companies, namely DDGÁZ, DÉGÁZ, ÉGÁZ, KO”GÁZ and TIGÁZ were responsible for gas distribution and supply. OKGT performed all the activities integrated into the oil and gas business, except import and export of raw materials and products, which was carried out by Mineralimpex, a fully state-owned foreign trade company under supervision of the Ministry of International Economic Relations and its predecessors.

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Figure 21 Main Gas Distribution and Supply Areas in Hungary 80 Source: IEA.

In 1995, the government began to privatise MOL, separate and privatise the regional gas distribution companies and integrate Mineralimpex into MOL. MOL’s majority shares were issued in several tranches on international exchanges for financial investors. As of 31 December 2001, foreign investors owned 46.3% of MOL’s capital, the Hungarian government retaining 25% of the capital and a golden share through the Hungarian State Privatisation and Holding Corporation (ÁPV). The rest of the capital is shared between OMV (10%) and Hungarian private and institutional investors (18%). Though this situation is expected to change, MOL is currently the sole producer of natural gas in Hungary and the principal company responsible for foreign trade. MOL also owns the Hungarian high-pressure natural gas transmission and gathering pipeline network, which transports both domestically produced and imported gas to the gas distribution companies’ local pipeline systems. MOL is the only licensed gas wholesale supplier in the country. It performs production, import, storage, transmission and sales to gas distribution companies and large industries and generators connected directly to the high-pressure transmission grid. In October 2000, prior to EU accession, Hungary decided to implement some of the guidelines from the 1998 EU directive on natural gas, by vertically unbundling MOL’s activities: MOL established three separate, affiliated firms for gas transportation, underground storage and gas trading. The majority of the six major regional gas distribution companies’ shares were sold as international tender to foreign investors, such as Italgas (Italy), Gaz de Figure 22

(of which: Ruhrgas 41.4% RWE 41.4%)

(of which: GDF 63.9%)

(of which: RWE 32.7%)

(of which: E.On Hungariá 31.2% EVN 31.2%)

(of which: Italgas 40% RWE 29.7%)

%

0

Foreign investors

DÉGÁZ

DDGÁZ

ÉGÁZ

” FOGÁZ

” KOGÁZ

TIGÁZ

40

20

Others

(of which: GDF 72.6%)

60

(of which: Local govt. of Budapest 52% )

80

(of which: MOL 35.5%)

100

(of which: MOL 27.2%)

Ownership Structure of Regional Gas Distribution Companies

Source: Association of Gas Distribution Companies.

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France (GDF, France), Ruhrgas (Germany), RWE (Germany), EVN (Austria) and Bayernwerk (Germany). The capital of these companies has changed hands since their initial privatisation. The current situation demonstrates that MOL once again owns large shares in some of these gas distribution companies.

NATURAL GAS TRANSPORTATION MOL operates a fully integrated transportation system, with 14 entry points feeding gas into the high-pressure transmission system and 385 gas delivery stations. Two entry points, namely Beregdaróc, located in the north-east on the Ukrainian border, and Mosonmagyaróvár, located in the northwest on the Austrian border, receive imported gas. Gas sold to partners in Bosnia and Serbia and Montenegro transits at the Kiskundorozsma measuring station 34. MOL owns Hungary’s 5 278 km (2002) network of high-pressure gas transportation pipelines through MOL Földgázszállítás (Natural Gas Transmission), its gas transportation unit and the successor organisation of KFÜ, which, although unbundled from MOL in accounting and managerial terms, remains fully owned by MOL. Typical operating pressure across the system is between 63 and 75 bars, with pipe diameter measuring between 100 and 800 mm. Construction began in 1963, with almost 50% of the system being built between 1963 and 1980. Since the early 1990s, MOL has carried out regular inspections with “intelligent pigs” and the results have confirmed that most sections of the aged pipelines need major reconstruction work, though adequate maintenance has ensured security of supply, safety of operation and no major damage to date. The Hungarian gas pipeline network is interconnected to Russia via Ukraine, via the “Brotherhood” pipeline. The daily capacity of this pipeline is 42 million m3 per day. The total capacity is divided into 30 million m3 per day for Hungarian and 12 million m3 per day for transit purposes. This translates into 15 bcm maximum annual capacity and 10 to 12 bcm average annual capacity. MOL has transported natural gas to former Yugoslavia since 1979. In 2001, the former Yugoslavia and BH-Gas of Bosnia-Herzegovina concluded an amendment on long-term natural gas transportation. Under these contracts, MOL transmits 1.7 bcm per annum of natural gas to former Yugoslavia and 0.2 bcm per annum of natural gas to Bosnia-Herzegovina. Since October 1996, the Hungarian gas grid has been interconnected to the west European grid via the HAG natural gas pipeline between Gyo”r in Hungary and Baumgarten in Austria. This pipeline is 120 km long, 70 km of

34. There is another measuring station at the centre connecting the Hungarian and Slovakian systems, but it is currently not in operation.

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Figure 23 Natural Gas Transportation Infrastructure

83

Source: Natural Gas Information 2002, IEA/OECD Paris, 2002.

which are on Hungarian soil, and has an annual capacity of 4.4 bcm. Construction began in September 1995 and the line was in operation by October 1996. A compressor station was constructed in Mosonmagyaróvár in 2001.

NATURAL GAS DEMAND Natural gas is essential to the Hungarian economy. In 2001, it represented almost 41% of Hungary’s primary energy supply, with 11.4 Mtoe, or 12.85 bcm, an absolute peak in Hungarian gas supply history. Gas demand from industry shrunk substantially after the collapse of the political and economic systems in the early 1990s. The share of industrial gas consumption decreased from 42% in 1990 to only 18% in 2000 35. The shares of the residential and commercial sectors grew significantly to represent 30% and 20% respectively, against 18% and 7% in 1990. The number of household customers increased continuously and linearly for many years to reach three million in 2001 (out of the four million Hungarian households), close to saturation level. The same is true for the commercial sector. Consumption by the industrial sector may increase slightly in the future, but no major change in the growth trend is expected. Demand by the power generation industry is uncertain and will be affected by the future role of nuclear. In 2000, 61% of the total thermal non-nuclear electricity generating capacity was multi-fired, with plants running mostly on natural gas, but able to switch to other fuels, namely liquid or solid if necessary.

Table 9 Gas Consumption by Sector, 2000 Sector

Share (%)

Consumption (bcm)

Power

18

2.1

Industry

18

2.1

Residential

30

3.6

Commerce - public services

20

2.4

Others

14

1.7

Total

100

12.0

Source: IEA.

35. Sectoral final consumption as a percentage of primary supply.

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Figure 24 Final Consumption of Natural Gas by Sector, 1973 to 2020 10

8

Industry

6

Residential 4

Other*

Mtoe

2

0 1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

* includes commercial, public service and agricultural sectors. Sources: Energy Balances of OECD Countries, IEA/OECD Paris, 2002; and country submission.

Figure 25 Monthly Gas Consumption, January 1994 to April 2002 2 500 Underground gas storage replenishment

2 000

Gas distribution companies

1 500

Power plants 1 000

500

Industry

0 January April July October January April July October January April July October January April July October January April July October January April July October January April July October January April July October January April

Million m3

Chem. ind.

1994

1995

1996

1997

1998

1999

2000

2001

2002

Source: Hungarian Energy Office.

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Demand seasonality has been accentuated by the fall in industrial gas use that significantly reduced baseload gas demand. High gas penetration in the residential sector brought a strong increase in temperature-dependent gas consumption. The ratio between gas sales in the peak and lowest demand months of the year was 4.2 to 1 in 2000, a very high level compared to other European countries. Winter monthly peak gas consumption is largely satisfied by drawing from underground storage, which represents up to 35% of annual demand. MOL reduces production from its own wells in the summer months but sends large amounts of gas into storage, especially from imports under TOP contracts.

NATURAL GAS SUPPLY Domestic Production According to the Hungarian government, Hungary has 38 bcm of natural gas reserves, corresponding to an 11-year reserve-to-production ratio. At the beginning of 2000, domestic production reached 3.2 bcm. Gas production began soon after the discovery of Hungary’s natural gas reserves in the 1960s and peaked in 1985. In 1973, Hungary could meet 96% of its domestic demand from its own production. By 2001, the country’s self-sufficiency had reduced to 25%, with three-quarters of gas supplied to domestic consumers having to be imported. The government forecasts that in 2010 domestic gas production will decline from its current level of around 3 bcm to approximately 2 bcm. All the gas in Hungary is produced by MOL, which also holds licences in more than 30 of Hungary’s exploration areas for oil and gas. Several foreign companies also carry out oil and gas exploration in the country. Although Hungary is relatively well explored, the upstream regime for oil and gas has been successful in attracting new international companies. El Paso (US) has discovered commercial quantities of gas in south-west Hungary (south of Lake Balaton), and is now preparing to produce and market the gas. Initially, this will be done through MOL, given that until the new Gas Law comes into effect, independent producers are prohibited to sell their gas directly in Hungary. Avco Horizon (US) has also found gas in western Hungary, while Pogo International (US) and MOL have made discoveries in central Hungary. All natural gas production permits are issued by the Hungarian Bureau of Mining. The mining royalty for natural gas produced in Hungary is 12% of the average gas fee. Under the 1993 Mining Law, “old” gas (i.e. discovered before 1993) should be sold domestically under Hungarian government price control, while “new” gas (i.e. discovered after 1993) will be liberalised. The “old” gas makes up about 85% of Hungary’s gas reserves. Until export licences are granted or market liberalisation takes effect, “new” gas is effectively the same as “old” gas, with

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Figure 26 Indigenous Gas Production and Imports, 1973 to 2020 14 12 10 8

Imports

6

Production

4

Mtoe

2 0

1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

Sources: Energy Balances of OECD Countries, IEA/OECD Paris, 2002; and country submission.

its price capped at an artificially low level (see below). Hungary exports small quantities of natural gas to former Yugoslavia (80 mcm in 2000 and 4 mcm in 2001). Imports MOL and Panrusgáz 36 are Hungary’s sole importers of natural gas. Their three major suppliers for imported gas are Gasexport 37, Ruhrgas and GDF. MOL is the only licence holder authorised to sell wholesale gas in Hungary. All imported gas is Russian. Natural gas imported by Panrusgáz enters Hungary at Beregdaróc via the Brotherhood pipeline (68% of the imported gas) and Mosonmagyaróvár via the HAG (Gyo”r-Baumgarten) pipeline, while supplies contracted from Ruhrgas and GDF only enter at Mosonmagyaróvár via the HAG pipeline. Supplies from Panrusgáz represent 14% of imports, while supplies from European wholesalers represent 12%, and those from Ukraine represent 6%. In 1975, Hungary began to import natural gas from Russia. The Orenburg contract, concluded within the framework of the COMECON between the 36. Panrusgáz is a joint venture owned by MOL and Gazprom (50%), created to import Russian gas in Hungary. 37. A subsidiary of Gazprom.

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former Soviet Union and Hungary on 21 June 1974, was the first supply contract signed with Russia. Under this contract, 2.8 bcm of natural gas per annum from the Orenburg field were delivered to Hungary up to 31 December 1998. The Yamburg contract, amounting to 2 bcm per annum of gas from the Yamburg field, was signed between Hungary and the former Soviet Union on 30 December 1985, and was extended on 9 September 1991 to 31 December 2008. On 7 November 1996, a 20-year contract was signed between MOL and Panrusgáz for delivery of 194 bcm of gas – including the Yamburg extension – between 1 October 1996 and 31 December 2015, with the possibility to purchase an additional 2 bcm per annum between 2000 and 2015. This contract amounts to 10.2 bcm per annum and covers the largest part of future gas needs, estimated by MOL to reach 14.2 bcm by 2010. Based on the possibility of diversifying physical gas deliveries opened up by the HAG pipeline, MOL signed a 10-year supply agreement with Ruhrgas on 10 May 1995 for the delivery of 0.5 bcm of gas per annum, which came into effect in October 1996 when the HAG pipeline opened. On 6 December 1996, MOL signed an additional 15-year contract with GDF for the supply of 0.4 bcm of gas per annum through the same pipeline, starting on 1 January 1997. In October 1997 another 15-year contract was signed with Ruhrgas, for delivery through the HAG pipeline from 1998 onwards with a starting volume of 0.1 bcm of gas per annum, to increase to 0.76 bcm after 2006. Gas contracted from western European suppliers is essentially supplied through swaps, i.e. Russian gas delivered on its way to France or Germany. In 2001, about 2.5 bcm of gas was delivered through the HAG pipeline, of which 1.1 bcm was contracted from western suppliers. These deliveries are priced above direct supplies from Russia, which are still the cheapest. Though other potential sources exist 38, it is unlikely in the near term that large amounts of gas will be imported from other sources than Russia. Given that the HAG pipeline is linked to the western European gas grid, it could offer some additional security of supply if Russian gas supplies are interrupted to Hungary. It is not clear how much physical supply could be expected through the western interconnector if Russian deliveries to western Europe were curtailed. Natural Gas Storage MOL is the largest owner of storage capacity in Hungary. In 2001, Hungary had 3.24 bcm of working gas storage capacity, with a daily withdrawal 38. In the long term, Iranian gas could be supplied through Turkey and Romania. An LNG terminal could also be built on the Croatian Adriatic coast that would enable gas supply from countries such as Algeria or Qatar.

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capacity of 43.2 mcm from five underground gas storage facilities, which are all depleted natural gas fields. This relatively large working gas capacity enables MOL to meet a high percentage of peak winter demand. Storage capacity is expected to increase by 700 mcm by 2010. Figure 27 Gas Storage 4 000 3 500 Új FGT 3 000 Maros I. 2 500 Kardoskút 2 000 Pusztaederics 1 500 Zsana I-II-III Million m3

1 000 Hajdúszoboszló 500 0 1988

2000

2005

2010

Source: Hungarian Energy Office.

NATURAL GAS PRICES At the time of writing this report, price regulation was still carried out under the 1994 Gas Supply Act and Gas Pricing Decree, pending new legislation in the form of a Gas Law still before Parliament. The regulatory framework set out in the 1994 legislation was initially intended to apply between 1 January 1997 and 31 December 2001. It was extended until 30 June 2002, and then maintained. The MEH calculates wholesaler and final consumer tariffs, but does not implement them. Final price levels are determined by the Ministry of Economy and Transport. Wholesale prices are calculated using a cost-plus formula based on the following factors: ●

Domestic gas production cost.

●

Price of imported gas.

●

Justified operational costs of gas supply including an 8% real return on equity.

89

●

Domestic industrial sales price index excluding food and energy industries.

●

HUF exchange rate.

●

Efficiency improvement factor forcing the gas industry to reduce costs by reducing allowable prices (ranging from 5% to 15%).

The natural gas end-user price is the same throughout the country. In 1999, a Ministry of Economy Tariff Decree (11/1999.GM) introduced two-component retail tariffs, which have been applied to every consumer category since 1 July 1999. This decree implemented the EEC recommendation 83/230/EEC calling for the introduction of a capacity charge in addition to consumption-related tariffs in end-user gas prices. The following basic principles and requirements were taken into consideration: ●

Charges should reflect, as much as possible, the incurred costs and, if possible, any cross-subsidies must be abolished.

●

Social considerations should not play a role in establishing prices.

●

Prices must be value-proportioned and reflect safety and value of service.

The gas consumption charge consists of two parts: i) a standing charge or capacity charge 39; ii) a commodity charge. Price reviews have been triggered by demands from interested parties as well as through the quarterly price adjustment mechanisms, every January, April, July and October. Price increases after 1994 substantially lowered household and industrial natural gas price subsidies. In 1999 and 2000, the Hungarian gas market experienced large price increases, as did the oil market. In the July 2000 round of price revisions, consumer prices increased by 12%. In the November 2000 round, prices for industrial consumers with a capacity above 500 m3 per hour increased by 43%, bringing prices close to cost levels. In July 2002, there was a 4.2% gas price increase for industrial consumers only. Despite relatively high inflation levels, real gas prices increased above inflation, helping to catch up with costs. On average, natural gas prices grew by 5% per annum in real terms for households and by 6% for industry between 1994 (first quarter) and 2002 (second quarter) 40. However, this proved insufficient to catch up with costs, which have also grown, especially for households, where service costs are higher given seasonality of demand and a relatively lower load factor. Despite these price increases, private Hungarian gas supply and distribution companies are demanding higher prices because they consider that their costs 39. If the rated (total) capacity of the gas meter(s) is 100 m3 per hour or lower, the consumer pays a standing charge on the basis of the capacity of the meter, and if the rated (total) capacity of the gas meter(s) is higher than 100 m3 per hour, a capacity charge in accordance with the capacity demand (specified in cubic metres per hour) stipulated in an individual contract is payable. 40. Calculated from IEA and OECD databases.

90

Figure 28 Gas Prices in Hungary and in Other Selected IEA Countries, 1980 to 2001 Industry Sector 250 Czech Republic 200 Austria

150 Hungary

US$/10E7 kcal GCV

100

50

0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

Household Sector 500 Austria 400 Czech Republic

300 Hungary

US$/10E7 kcal GCV

200

100

0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

Source: Energy Prices and Taxes, IEA/OECD Paris, 2002.

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Figure 29 Gas Prices and Taxes in IEA Countries, 2001 Industry Sector Switzerland Greece Turkey United States France Spain Netherlands Ireland

Tax component

New Zealand Hungary Czech Republic United Kingdom Finland Canada

0

50

100

150

200

250

300

350

US$/10E7 kcal GCV Note: Tax information is not available for Canada and the United States. Data not available for Australia, Austria, Belgium, Denmark, Germany, Italy, Japan, Korea, Luxembourg, Norway, Portugal and Sweden.

Household Sector Denmark Spain Switzerland France Netherlands United States Austria Ireland Greece Luxembourg New Zealand United Kingdom Canada Turkey Czech Republic Finland Hungary

0

100

200

300

400

500

Tax component

600

700

800

US$/10E7 kcal GCV Note: Tax information is not available for Canada and the United States. Data not available for Australia, Belgium, Germany, Italy, Japan, Korea, Norway, Portugal and Sweden.

Source: Energy Prices and Taxes, IEA/OECD Paris, 2002.

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for purchasing gas from MOL are not being fully recovered. MOL is in difficulty because it must sell gas at prices that are capped at levels below the acquisition costs. This situation has generated some conflict between the suppliers, MOL, the MEH and the Ministry of Economy and Transport. In 2000, 2001 and 2002, the gas price increase restrictions led MOL to incur losses for the first time in its history, totalling about US$ 1 billion. Consequently, MOL has suspended most infrastructure improvements of its gas transmission system, as well as investments in pipeline and storage capacity to improve its ability to respond to demand seasonality. MOL is considering the option of selling its gas division to a commercial buyer or to the State. MOL has been working with the Hungarian government to rework the natural gas price structure. In January 2003, the government announced a 12% price increase for residential customers and a 15% price increase for non-residential customers, with a capacity demand below 500 m3 per hour, effective from 15 May 2003. These price increases are insufficient given that a 22% to 25% average price increase is needed to break even. If the price distortion is not corrected, its repercussions will be even worse when the new environmental regulations take effect in 2004 and natural gas becomes a fuel of choice for generating power. This will bring the risk that decisions on investment in new gas-fuelled power plants for peak power demand and their subsequent operation will be influenced by incorrect price signals. The artificially low regulated price of gas could have substantial negative implications for security of supply, and work against the efficient allocation of energy resources within the Hungarian economy.

TOWARDS A NEW GAS MARKET MODEL The Hungarian government is still in the process of debating a Gas Act that would pave the way for the implementation of a new gas market model. Many of the elements currently under discussion were being debated during the preparation of the last IEA In-depth Review. By 1999, the government had already completed the partial privatisation of MOL and the separation and privatisation of the gas distribution companies. The government's approach to privatisation of the oil and gas industries changed considerably throughout the early 1990s. Early on, the government decided that the gas distributors were to be fully privatised, whereas privatisation of MOL was to occur somewhat later, and only down to a blocking minority of 25% plus one share (considered as the minimum government shareholding in strategic, previously state-owned companies). After separating MOL from its distribution (and other) affiliates in 1991, the government sought a strategy that would yield maximum revenue from gas industry privatisation. In 1993, this engendered plans to allow or even promote vertical reintegration between MOL and the regional distribution and retailing companies. Allowing MOL to acquire shares in the regional distributors was seen as increasing the

93

company's attractiveness to investors. Partial privatisation of MOL was completed down to 25% plus one share by 1995. At the end of 1994, the government decided to go ahead with full privatisation of the gas distribution companies, except FO”GÁZ, in which it wanted to retain one golden share. In 1995, a tender for foreign investors was launched. Initially, ÁPV offered investors majority stakes of 50% plus one vote. A further 40% of the shares were transferred from ÁPV to the municipalities supplied by the companies. Soon after the gas distributors were publicly listed, the municipalities also decided to sell most of their shares. The only exception being KO”GÁZ, where the municipality decided to keep all of the shares attributed to it. One restriction on investors was retained in order to limit market power: investors in TIGÁZ, by far Hungary's biggest retailer, were not allowed to obtain shares of any other retailer. FO”GÁZ’s owner, the Budapest municipality, offered investors the choice between majority and minority shareholdings. Investors chose minority shareholdings with all the associated rights. Although MOL is still Hungary's only licensed gas producer and transporter and still dominates gas imports and exports, competition does exist in the Hungarian gas industry, at least theoretically. Under the 1993 Mining Law (Act XLVIII of 1993 on Mining) and the 1994 Gas Law (Act XLI of 1994 on Gas Supply), MOL must provide TPA to its highpressure gas transportation infrastructure under the following two conditions: ●

There has to be spare pipeline capacity.

●

The gas shipped must be produced in Hungary.

A 1991 government decree stipulated that MOL must offer the same gas transportation tariffs to third parties as it uses in its own internal accounts. Regarding access to gas storage facilities, the legal framework determines that access must be provided where the storage facilities are independent from producing gas wells. These provisions have not yet resulted in effective competition for end-user supply. Until recently, several areas were not covered by the existing gas distribution companies. Supply to these areas was opened to competition by the MEH and supply licences have been attributed separately municipality by municipality. The heterogeneous pattern of supply areas, already present under the previous system, is thus enhanced, which could be a good starting point for competition in distribution. In the mid-1990s, the government decided that the EU Gas Directive (98/30/EC) would be implemented by the time Hungary becomes a full member of the EU. The government elected in April 2002 decided to make several changes to the Gas Act proposed in 2001, hence delaying it being presented to Parliament. Provided it is adopted, the act could come into force in 2003 or 2004.

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Figure 30 Functional Model of the Hungarian Gas Industry

Import/export

MOL: Production

MOL: Wholesale trading Wholesale and dispatch. price Pipeline transportation. Storage

Distribution companies: 6 major distributors/ retailers

Public utility contract

End-user price

Consumers

Commercial contract

Production from new mining concessions Gas deliveries Source: Hungarian Energy Office.

The implementation of this act would signify the emergence of two markets; a competitive market for eligible gas consumers and a regulated market for public or captive service consumers. As a first step, 40% of the largest natural gas consumers would become eligible. New market participants could begin importing gas freely. Companies responsible for supplying gas to non-eligible consumers would have to buy natural gas from a wholesale supplier. Eligible consumers would be allowed to purchase gas directly from traders. MOL is already preparing for the new Gas Act that would require further unbundling between gas transportation (system operation), storage, public utility wholesaling, trading and cross-border importing activities. In the new market model, the government will guarantee transparency and fair access to transmission and storage facilities. The MEH will control TPA and the implementation of the network code. Additional changes could include the creation of a new gas pricing mechanism and the discontinuation of centrally setting prices for gas produced in Hungary. The government is also envisaging raising the royalty

95

fees, to limit the production of domestic gas and to preserve domestic resources, and raising extra revenue to fund possible direct support to lowincome households who would be adversely affected by rising gas retail prices. The mechanism to increase mining fees could be based on international changes in gas prices. If the global price of natural gas falls below US$ 92 per 1 000 m3, the levy would be 12% (as it is now) and if it rises above US$ 110 the levy would be 40%. The levy between these two gas price thresholds would be negotiated in the range of 12% to 40%.

CRITIQUE Security of natural gas supply is vital for Hungary given its large share in the energy mix. In this context, it is commendable to seek to diversify the natural gas supply by increasing quantities coming through the HAG pipeline. The opening of the Hungarian upstream market is also commendable, especially in view of the potential contribution of indigenous gas production in improving security of supply and facilitating competition. However, the prospect for domestic production could be hampered by several factors. First, the remaining arrangements differentiating between “old” and “new” gas creates distortion and uncertainty, which discourages domestic producers. Moreover, as long as the gas market is not liberalised, “new” gas has to be sold on the domestic market at prices which are still artificially low, to the point that it may not appear economical to do so. This will seriously discourage further investment in domestic production. All gas should be priced in the wholesale market on a market-related basis. Second, if for fiscal policy reasons the government decides to impose an excess profits tax on incumbent producers whose facilities have been fully amortised – perhaps in order to raise revenues to mitigate the impact of gas price increases on low-income households –, it should make sure not to go beyond the energy policy objective to capture excess profits and avoid cutting deeper. Third, while sufficient pipeline capacity seems to exist when the time comes to extract the gas, companies express difficulty in obtaining export licences for the sale of gas outside Hungary. The government considers that domestic natural gas should be kept for domestic consumption, given the limited reserves and growing consumption. For example, if the implementation of EU environmental standards boosts gas demand for power production. However, this policy will not be successful while economic viability of domestic production is uncertain, owing to artificially low domestic gas prices and export constraints. Fourth, the proposed linkage between the royalty regime for domestic gas production and the new pricing arrangement under the proposed Gas Act

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Figure 31 The New Gas Market Model Competitive Market Organised natural gas market

Natural gas trade licence holder

Gas sources (import, domestic production)

Eligible consumers

Gas transmission licence holder, Gas storage licence holder, Gas distribution licence holder

Regulated Market Domestic production

Competitive market players (import, organised market, gas trade licence holders)

Non-eligible consumers directly supplied from transmission lines

Natural gas wholesaler licence holder for non-eligible consumers

Distribution licence holder for non-eligible consumers

Gas distribution licence holder Gas storage licence holder

Gas transmission licence holder

Non-eligible consumers

Trade connections Service connections

Source: Hungarian Energy Office.

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could have a negative impact on domestic production. The government is envisaging increasing royalty fees to partly finance support to low-income consumers affected by natural gas retail price increases. This could result in discouraging domestic production, which is contrary to Hungary’s energy security interests. Finally, delays in adopting the new Gas Act generated many uncertainties for domestic gas producers. The solution to these issues would basically be to implement the proposed Gas Act as soon as possible, since it would clarify the regulatory framework and reduce uncertainties for all the natural gas market participants. To design the new Gas Law proposed in 2001, the government and the MEH have been investigating ways in which the Hungarian gas market can be adapted to the EU gas directive, debating over the following issues: ●

Eligibility of the regional distribution companies. MOL directly supplies its 18 largest customers above 5 mcm per annum; 12 of these are not distributors and will be eligible for competition according to the rules of the directive. The current government's policy is that the distributors could become partially eligible to competition – for the part of their market which is eligible – to allow them to gain lower prices, otherwise they would face the risk of losing customers both to new market entrants and to MOL, thus creating stranded costs. The dense Hungarian high-pressure gas grid, with its many take-off points, is thought to give MOL an easy opportunity to outcompete the distributors with respect to their eligible industrial customers.

●

Take-or-pay contracts. The issue of TOP contracts, and especially the possibility that Gazprom may out-compete MOL in its downstream market, is another area of concern. If this happened and MOL lost sales volumes, it would trigger MOL's TOP obligations with respect to either of the companies. A possible solution would be to reduce the TOP obligation by exactly the amount lost to Gazprom because of competition, although this solution would only work in the case of bilateral conflicts of interest.

●

Security of supply. Hungary and Austria have traditionally used strategic storage to address security of supply. In particular, Hungary has an explicit policy of responding to its declining domestic gas production and the increasing import dependency on Russia via strategic storage. Russian gas will remain the least expensive, at least in the near future. In the absence of a European policy on strategic gas storage, this raises the question of how to recuperate the cost of such storage, which is considerable, in the competitive gas market.

The potential for strong and healthy competition in the Hungarian natural gas market is small given the intrinsic constraints to the development of competition, particularly on the gas wholesale supply side:

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●

All of Hungary’s gas is Russian gas, which eliminates the possibility for suppliers to compete over gas supply sources, at least in the near future.

●

While the share of gas in the electricity sector is likely to increase after the implementation of EU environmental standards, future growth of the volume of gas demand is uncertain because there are doubts whether electricity demand will increase at sustained rates over the next few years. Consequently, Hungarian gas demand could exceed the total existing gas supply contracted through long-term arrangements, thus requiring additional imports at prices that may be higher than existing contract prices. Alternatively, Hungarian gas demand could also be equal to, or lower than, contracted gas supply, leading to limited or no scope for market entry by competitors, or to stranded costs for MOL.

Furthermore, competition between distribution companies is likely to be reduced because GDF and Ruhrgas are key shareholders of four of the six companies. Taking these constraints into consideration, the development of the gas market will have to be monitored carefully to ensure that there is sufficient scope for competition to deliver significant benefits to consumers. The appropriate authorities, including the MEH, should continue to monitor the effects on competition of existing TOP contracts, limited sources of supply and interaction with stranded costs. Natural gas demand displays high seasonality, mainly because of important temperature-related household consumption. This problem may become more of an issue as gas is increasingly used for power generation. It raises security of supply issues. There are four theoretical ways to handle this demand seasonality, namely: ●

Demand-side measures, e.g. curbing demand through interruptible contracts to induce temporary fuel switches during peak demand in case of possible tensions on gas supply.

●

External supply-side measures, increasing capacities of gas transmission and distribution pipelines to avoid possible shortages.

●

Domestic supply-side measures, discovering and exploiting new gas fields for swing supply purposes to increase the gas supply.

●

Domestic supply-side measures, storing gas to face peaks.

Interruptible contracts have been introduced for some large consumers in Hungary to decrease peak demand. This is still the most practical way to address short-term requirements to meet peak gas demand since most of this demand arises from households, which cannot substitute gas with other fuels.

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Recuperating the high cost of storage is a challenging task in a competitive market. There are several options. One solution under consideration is to raise a levy from all consumers, exploiting the EU directive clause on public service obligations since the gas required during peak time is principally for households. Another solution would be to raise the price of gas for those consumers responsible for peak demand. In any case, the government should set up the necessary conditions (through levy or household price increases) to facilitate MOL’s investments and keep this option under review in consultation with the MEH. Although major problems have been avoided through adequate maintenance, most sections of the gas transportation and distribution pipelines are old and in need of major reconstruction works, which increases risks of supply disruption. Given the strong dependency on natural gas, both the operation of the market and the consumers would benefit from a government contingency plan that could be implemented in an emergency disruption of the gas supply. Such a plan does not yet exist. Gas has a central position in the Hungarian energy economy. Artificially low household gas prices have had major impacts in a number of areas, including weakening the security of gas supply, distorting fuel choice and providing a weak incentive for taking demand-side energy efficiency measures. The Hungarian administration acknowledges this problem. The decision in 2001 to restrain household gas prices at a time of sharp increases in the price of imported gas is therefore regrettable. It exacerbates market distortions from underpricing, and makes it more difficult to move to market-related prices. The IEA review team recognises the social impacts of bringing gas prices to market-related levels, since the purchasing power of some of the population is still relatively low. The social issue should be addressed through targeted direct support to those most affected.

COAL COAL PRODUCTION AND IMPORTS Coal represented 16% of TPES in 2000, against 22% in 1990, displaying a constant regression over the period, a phenomenon that has lasted for several decades. More than 90% of sub-bituminous coal supply (brown coal) is used for power production. Though it was important until the beginning of the 1990s, household use of coal has almost disappeared. Coal supply in 2000 amounted to 4 Mtoe, of which 1.2 Mtoe (approximately 30%) was imported, principally from the Czech Republic, Poland, Russia and Ukraine.

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Figure 32 Final Consumption of Coal by Sector, 1973 to 2020 5

4

Industry

3

Residential 2

Other*

Mtoe

1

0 1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

* includes commercial, public service and agricultural sectors. Sources: Energy Balances of OECD Countries, IEA/OECD Paris, 2002; and country submission

Today, Hungary produces very little coal. However in 2001 it produced almost 4 Mtce (14 Mt) of sub-bituminous coal. This production is stagnating or even decreasing depending on the years. Of the 1.5 Mtce of imports, 1 Mtce was coking coal and the rest sub-bituminous coal and coal products. Hungary has more than 3.1 billion tonnes of estimated coal reserves. The bulk of this is lignite, with 2.7 billion tonnes, followed by 0.2 billion tonnes of sub-bituminous coal and 0.2 billion tonnes of hard coal. Hungarian coal has comparatively low calorific value and high ash and sulphur content. Subbituminous coal has a heat content of about 10 000 to 14 000 kJ/kg, and lignite has a heat content of about 6 000 to 8 000 kJ/kg. The significant amount of sulphur (>1% by weight) in sub-bituminous coal means that power plants using it must invest in flue gas desulphurisation retrofits to remove sulphur dioxide produced by the combustion of this coal. Coal production costs are high at many of the remaining mines, especially those situated underground because the coal must be mined quite deeply. The Pécsi hard coal opencast mine and the Visonta and Bükkábrány lignite opencast mines are profitable. Lignite deposits located in north-east Hungary may offer the only profitable future investment possibility in coal production in Hungary.

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Today, coal is produced in 12 opencast and nine underground mines. Subbituminous coal is extracted from seven mines, two of them having yearly outputs of more than 1 Mt. All of these are underground mines, which affect the cost of coal and the subsequent economics of sub-bituminous coal use. The underground mines remain economical either because of their proximity to power plants that use the coal or, in the case of very small mines, their proximity to municipalities where the coal is used for home heating. Some marginal production of hard coal also exists in Hungary, though its mining is in decline. There are only two active opencast mines, both in the south of Hungary. Hard coal in Hungary is actually fairly plentiful, but it is neither easy nor very economical to mine; the seams are not very thick, are at times steeply sloped and contain relatively large amounts of methane. A Canadian and an Australian company attempted to extract methane from these seams, but the procedure has so far proved uneconomical 41.

COAL REFORM After the collapse of the communist system, the coal sector entered a major financial crisis, forcing the government to implement a restructuring policy that began in the early 1990s. A programme to close uneconomical mines was initiated and continued through the last four years, with the closure of several hard and sub-bituminous underground coal mines. Whenever possible, mines were integrated with power plant companies. Integrated mines received neither direct state aid nor indirect support through the price of the generated electric energy. Their existence has been linked to the expiry of the power generators’ operating licence. A majority of the integrated mines are owned by MVM, the incumbent electricity monopoly wholesaler. The non-integrated mines received a subsidy in the transition period before closing, as well as support through power industry purchasing contracts concluded as a result of government pressure on the power industry, since most of these mines were located in areas of high unemployment. There are at present about 8 000 coal miners in Hungary, down from 19 000 in 1995. The Nógrád mine (Nógrádi külfejtés), an opencast sub-bituminous coal mine, is the only mine that is still not attached to a power plant in Hungary. It is profitable and does not receive subsidies. All the others have now been closed. From 2000, the government decided to eliminate state operational subsidies. There are no plans to provide further state aid except to finance the remaining 41. The Hungarian Geological Survey and the United States Geological Survey (USGS) have positively assessed coalbed methane availability in Hungary. In the Mecsek basin in south-west Hungary, where most of the Hungarian hard coal used to be mined, coalbed gas resource potential could reach 30 to 115 bcm of methane (USGS, 2002, Coalbed Gas in Hungary – A Preliminary Report, USGS Open File Report 01-473, US Department of Interior).

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Table 10 Principal Coal Mines in Hungary Mine Name

Coal

Mine

Type

Type

Company

Supplying

Merged

Closure

Power

with Power

Date

Plant

Plant Co.

Mines integrated with a power plant Pécs külfejtés

Hard coal

Opencast

Mecsek

Pécs

Pannonpower Ltd.

–

Ármin

Sub-bituminous

Underground

Veszprém

Ajka

Bakony Power Plant Co.

–

Balinka

Sub-bituminous

Underground

Veszprém

Inota

Bakony Power Plant Co.

–

Márkushegy

Sub-bituminous

Underground

Oroszlány

Oroszlány

Vértes Power Plant Co.

–

Mány

Sub-bituminous

Underground

Tatabánya

Bánhida Vértes Power Plant Co.

2003

Lyukóbánya

Sub-bituminous

Underground

Borsod

Tiszapalkonya

Borsodi Energetikai Kft

–

Visonta

Lignite

Opencast

Mátraalja

Mátra

Mátra Power Plant Co.

–

Bükkábrány

Lignite

Opencast

Mátra

Mátra

Mátra Power Plant Co.

–

Tatabánya Borsod

Mines non-integrated with a power plant

103

Putnok

Sub-bituminous

Underground

2000

Feketevölgy

Sub-bituminous

Underground

2000

Lencsehegy

Sub-bituminous

Underground

2003

Dudar

Sub-bituminous

Underground

1999

Rudolf

Sub-bituminous

Underground

2000

Nógrádi külfejtés

Sub-bituminous

Opencast

–

mine closures. The rehabilitation of mines is to be continued with private and state financial resources. Hungary’s accession to the EU is likely to accelerate the final steps of restructuring the coal industry, with the implementation of more stringent environmental regulations, especially if it results in the closure of some existing coal-fuelled power plants. However, many of the power plants have been or will be modified with retrofits, and no major changes are expected in the mining sector in the immediate future. The government is aware that the Hungarian Mining Act will need to be updated to keep up with changes in industry and the entry of new players in the energy exploration field, but this updating effort is likely to affect other types of mining and quarrying more than coal.

CRITIQUE The government has managed well the transition from a centrally-planned coal industry to a market economy. Given the limited cost-effectiveness of Hungary’s coal mining industry, the government chose to import increasing quantities of coal, while moving strongly towards restructuring the domestic industry. The decision to address coal industry issues in the context of a competitive international coal market is commendable. The fact that mines to be closed are located in regions of high unemployment is still a problematic issue. The government has decided to accompany the closure of unprofitable mines with transitional financial help to rehabilitate the regions affected by the closures. The mechanisms in place to mitigate the costs of mine closure and compensate workers who are made redundant seem appropriate and sufficient. It is remarkable that the government has maintained its determination to eliminate unprofitable coal mines, which is a positive step in the restructuring process. The policy to integrate unprofitable coal mines with power plants could however weaken the overall value of the government-owned power plant companies.

RECOMMENDATIONS The government of Hungary shoud: Oil ◗

Make sure that the relevant competition authorities continue to monitor whether oligopoly is developing in the regional market, and if there is a need for regulatory action.

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◗

Consider reducing the price distortion created by the relatively high excise duty on light fuel oil in order to diversify energy supplies for heating.

◗

Ensure the implementation of the law requiring that MOL submit the necessary data for the reporting requirement under international commitments.

Natural Gas ◗

Adopt the proposed Gas Act as soon as possible to implement a stable regulatory tax and pricing regime as a means to reduce uncertainties for all market participants, including domestic gas producers.

◗

Price all gas in the wholesale market on a market-related basis.

◗

If the government decides to impose an “excess profits tax” to capture, for the public benefit, excess profits derived from gas production at facilities that have been fully written down, ensure that such a tax only captures genuine “excess” profits.

◗

Continue to monitor the effects on competition of existing TOP contracts, limited sources of supply and interaction with stranded costs.

◗

Set up the conditions to facilitate the decision by MOL (or others) to install additional gas storage facilities, keep this option under review in consultation with the MEH and allow tariffs to reflect storage costs.

◗

Address the social consequences of bringing gas prices to market-related levels through targeted social policy measures.

◗

Develop a contingency plan for possible supply disruption, to ensure that appropriate co-ordinated emergency arrangements are put in place to avoid gas supply shortfalls, and for the safe reconnection of consumers in the event of a gas supply shortfall.

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ELECTRICITY AND NUCLEAR ELECTRICITY INDUSTRY STRUCTURE Since 1999, the Hungarian electricity supply industry has not changed dramatically. The industry structure is still largely dominated by MVM, which was created in 1992 following the government dismantling of the MVM Trust, formed in 1963. In 1992, the subsidiaries responsible for generation, transmission and distribution/supply of electricity were formed into independent joint stock companies, which continued to be owned by MVM and the government. The 1994 Electricity Act (Act XLVIII of 6 April 1994 on the Production, Transport and Supply of Electric Energy) came into force in 1994. This act describes the MEH’s tasks and responsibilities 42. MVM’s generation side was reorganised into eight different generating companies, the Vértes, Mátra, Tisza, Bakony, Budapest, Dunamenti, Paks, and Pécs power companies. Except for the Mátra, Dunamenti and Paks companies, all the power companies comprise several power plants. Paks Nuclear Power Plant owns and operates Hungary’s only nuclear power plant. In December 1994, it was decided to privatise all generating companies except Paks Nuclear Power Plant and the six distribution and supply companies. MVM would retain Paks Nuclear Power Plant and the transmission grid company OVIT. MVM would also continue to be responsible for the operation of electricity import and export, transmission, wholesale trading, supply, and investments in the development of all these segments. All of these functions were to be carried out at minimum cost. By early 1998, all distribution and supply companies and all generating companies, except Paks Nuclear Power Plant and Vértes, were at least partly privatised. MVM and Paks Nuclear Power Plant remained in state ownership, and no official decision regarding their privatisation has yet been taken. Some important players from outside Hungary took this opportunity to enter the market, such as Tractebel (Belgium), RWE (Germany) and AES (US). The basic transmission grid consists of 400 kV and 220 kV networks, maintained by OVIT, a 100% subsidiary of MVM. MVM still owns the grid’s assets. OVIT

42. Important legal provisions for the establishment of the MEH were also established earlier through the 1994 Natural Gas Act.

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8

is also responsible for maintaining the 750 kV Albertirsa substation and the interconnection to Ukraine. Since February 2002, the newly created stateowned independent system operator (MAVIR) has been separated from MVM. Its new owner is the Ministry of Economy and Transport. MAVIR does not yet own the licence to operate the system and is therefore licensed by MVM, the system operation licence holder. MVM is also responsible for wholesale supply in the country. MVM has import-export monopoly rights until the next steps of the reforms laid out in the December 2001 Electricity Act begin to be implemented in 2003 (see below). Six regional distribution companies are responsible for 120 kV or below network operation and the supply of electricity to end-users, with exclusive supply areas namely: ÉDÁSZ 43, ELMU” 44, ÉMÁSZ 45, TITÁSZ 46, DÉMÁSZ 47 and DÉDÁSZ 48. Their ownership is fairly concentrated, as three companies share the majority of their capital: EDF, E.On, RWE.

Table 11 Licence Holders of the Hungarian Electricity Industry, 2001 Generators AES Borsodi Energetikai

Transmitter

Distributors

MVM

DÉDÁSZ

AES Tisza Ero”mu” Bakonyi Ero”mu”

DÉMÁSZ ELMU”

Budapesti Ero”mu”

ÉDÁSZ

Csepeli Aramtermelo”

ÉMÁSZ

Debreceni Combined-cycle Power Plant Dunamenti Ero”mu”

TITÁSZ

EMA-Power Mátrai Ero”mu” Paksi Atomero”mu” Pannonpower Tiszavíz Vízero”mu” Vértesi Ero”mu” Source: Hungarian Energy Office.

43. 44. 45. 46. 47. 48.

Észak-dunántúli Áramszolgáltató (Northwest Hungary Electricity Supply). Budapesti Elektromos Mu”vek (Budapest Electric). Észak-magyarországi Áramszolgáltató (Northern Hungary Electricity Supply). Tiszántúli Áramszolgáltató (Eastern Hungary Electricity Supply). Dél-magyarországi Áramszolgáltató (Southern Hungary Electricity Supply). Dél-dunántúli Áramszolgáltató (Southwest Hungary Electricity Supply).

108

Figure 33 Electricity Distributors and Retailers in Hungary

Ukraine

Slovak Republic

Borsodi Energetikai Kft. AES

Austria

Tiszai Eromu Rt. AES

Mátrai Eromu Rt. RWE

ÉMÁSZ Rt. RWE-EnBW

ELMÜ Rt. RWE-EnBW

ÉDÁSZ Rt. EDF

Budapesti Eromu Rt. EDF

TITÁSZ Rt. E.On

Dunamenti Eromu Rt. Tractebel Csepeli Eromu Rt. Powergen EMA-Power Kft. EPIC Energy Hungary

Slovenia DÉDÁSZ Rt. E.On

Croatia

109

Source: MVM.

DÉMÁSZ Rt. EDF

Serbia

Romania

0

Km 30

60

GENERATION At the end of 2000, the Hungarian electricity supply industry comprised 8.1 GW of public utilities capacity and 220 MW of industrial autoproduction 49. The size of the power plants, their age and geographical location and the fuel they use reflect the pattern of past investment in generating capacity, which occurred in distinctive waves in Hungary. Plants burning brown coal were mostly commissioned in the 1950s and 1960s, although some date back to the 1930s and 1940s. They were generally very small and located near coal mines. Their thermal efficiency is low and many of them are in the process of being decommissioned or refurbished. Hungary’s lignite deposits situated in the northeast of the country were developed in the 1970s. This fuel was used in the Mátra (formerly Gagarin) power plant that has 100 MW and 200 MW generating units. Around the same time, larger “hydrocarbon” (oil and gas dual-fired) boiler plants were built, e.g. the Dunamenti and Tisza II plants, equally with larger block sizes of above 200 MW. Between 2001 and 2005, 800 MW of old plants are expected to be decommissioned, and 270 MW of new plants could come on stream. For this reason, the total installed and operating capacity is expected to be smaller in the coming years than in 2000 (7.77 GW in 2005). However, it is expected to increase, with plans to build 360 MW of new plants, mainly gas and perhaps oil, between 2006 and 2010 (total expected capacity of 8.13 GW), and 1 020 MW between 2011 and 2020 (total expected capacity of 9.15 GW) 50. With a reserve margin currently reaching 25% to 30%, Hungary has surplus generating capacity. One of the reasons is that several of the coal-fired power stations expected to be closed were not closed. Temporarily, there will be a larger reserve margin since additional generation has been contracted and some coal plants were not closed. Some tensions may arise after 2005 when new and more stringent EU environmental regulations will take effect that will accelerate the retirement of older coal-fuelled units. In the future, it will become increasingly difficult for Hungary to fulfil the UCTE requirement of a reserve margin in generation. Imports may grow as a result of a gap in domestic generation. By 2010, this shortage could reach as much as 1 000 MW if no new capacity is brought on line. The market will guide choices to either build new capacity or import power. If new capacity is constructed, it will probably be gas-fired, at least through the middle of the decade. After that, coal-fired power could increase its share if the cost of natural gas becomes too high. Coal would then be imported since domestic coal may not be of good enough quality 51. The most probable 49. The total capacity includes combined heat and power plants (CHP). 50. Source: IEA. These figures have to be used with caution because of the uncertainties concerning investment plans. 51. MVM has expressed reserve as to the possibility of developing fluidised-bed combustion (FBC) plants to utilise its sub-bituminous coal and lignite reserves, though the reasons behind this position may be based on coal cost as much as coal quality considerations. An installation of fluidisedbed combustion was reportedly cancelled at the Inota power plant, where the local mine has about a 20-year supply of sub-bituminous coal.

110

scenario is that Hungary will rely upon electricity imports from neighbouring countries. This is an acceptable situation since there is an anticipated surplus capacity in the region. This would however require increasing the cross-border transmission capacity (see below). The Paks plant was commissioned in 1981 to 1987 (see section on nuclear power, p. 128). Originally, there were plans to build two more nuclear units of 1 000 MW each at the Paks plant in the early 1990s, but the fall in demand made the plants unnecessary. Figure 34 Electricity Generation by Source, 1973 to 2020 50

Oil

40

Gas 30 Coal Other*

20

Nuclear

TWh

10

Hydro

0 1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

* includes solar, wind, combustible renewables and wastes. Sources: Energy Balances of OECD Countries, IEA/OECD Paris, 2002; and country submission.

In 2000, 40% of the electricity produced in Hungary was generated by nuclear, 28% by coal, 19% by natural gas and 13% by oil. The crucial importance of the Paks plant is clearly discernible. Renewables, mainly small run-of-the-river hydroelectricity plants, amount to less than 1% of power production. In 2001, the Hungarian electricity industry produced 36 TWh of electrical energy (4.8 TWh of it being CHP), with transmission and distribution losses of 4.6 TWh and sales reaching 32 TWh. On average, the efficiency of electricity generation is 38.3%, and has improved in the past decade. Transmission and distribution losses reached almost 13%. Much of the losses are non-technical, due to electricity pilferage, an issue that the electricity companies are trying to solve. The total level of losses remains high by European standards (7% in the EU in 2000) but this figure is decreasing.

111

Figure 35 Electricity Flow Diagram (GWh)

Domestic production 36 145

Autoproducers

Public power plants

Imports

35 688

457 own use 31

2 436

1 354

31 561

Own use of power plants

6 947

Available for transmission company 38 508

2 468 222

34 222

3 776

203 Available for supply companies

510

Exports

35 986

4 075

188 Transmission losses

own use

4 585

76

Sales of supply companies 31 835

Domestic consumers

31 647

32 263

Productive branches

Non-prod. branches

15 860

6 273

Source: Hungarian Energy Office.

112

Households 10 130

TRANSMISSION AND CROSS-BORDER FLOWS In 2000, electricity imports reached 9.5 TWh (5% from Austria, 79% from the Slovak Republic and 16% from Ukraine), while exports from Hungary reached 6.1 TWh (13% to Austria, 74% to Croatia and 13% to Serbia and Montenegro). Net imports represented less than 12% of annual Hungarian electricity consumption. The interconnection of the Hungarian grid is quite extensive. In the past, Hungary was highly dependent on electricity imports. More than one-third of its electricity consumption was imported (net imports) from Ukraine (within the COMECON) 52, through one high-voltage alternating current (AC) power line, of 750 kV/2 000 MW capacity, entering Hungary from Ukraine and ending at the Albertirsa substation in the centre of the country. Longdistance transport of electricity over this type of transmission line is economic only for very large amounts of electricity; it is used in a few exceptional cases where energy conversion into electricity cannot be carried out closer to consumption centres. This power line came into service in the late 1970s and is part of a larger 750 kV network that linked Bulgaria, Hungary and Poland to the former Soviet Union’s large-scale power plants, including the Chernobyl power plant in Ukraine. Hungary contributed financially to the construction of this line and some of the power stations it connects. There are two other power lines, a 400 kV and a 220 kV line, along a parallel corridor terminating at the Sajószöged substation in eastern Hungary. The importance of these lines cannot be denied, both for their capacity and their structuring effects on Hungary’s transmission system. Ukrainian imports stopped in 1993 as a consequence of domestic shortages. Shortly afterwards, the Ukrainian power system was isolated from the United Power System/Integrated Power System (UPS/IPS). Hungarian imports from Ukraine have begun again, but are far below their previous levels. As imports from the East reduced, Hungary increasingly imported electricity through the Slovak Republic, part of which originates from Polish power plants. In the early 1990s, Hungary sought to leave the UPS/IPS power system and to connect itself to the western European Union for the Co-ordination of Transmission of Electricity (UCTE) system. Hungary had to improve certain aspects of its power system. AC interconnection requires member utilities’ systems to be “in phase”. The UCTE system requires frequency control in a narrow band of +/– 0.1 Hz. Compliance with these technical requirements generally means that additional power plant capacity must be put in place. This capacity delivers so-called ancillary services, e.g. it generates only to maintain frequency or voltage at the required levels and must therefore be

52. In comparison, electricity imports currently account for less than 10% of electricity consumption in IEA Europe and less than 2% in North America.

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Figure 36 Import and Export of Electricity, 1990 and 2000 (TWh)

Source: Energy Balances of OECD Countries, IEA/OECD Paris, 2002.

114

Figure 37 The Hungarian Transmission Network and Main Power Plants

115

Source: MVM.

capable of starting generation very quickly. Since Hungary does not have mountainous areas suitable for hydro plants with storage capacity, a number of gas turbines were installed. After several encouraging test runs, the CENTREL and UCTE systems were synchronised in 1995 and continued to run in parallel 53. In May 2001, Hungary became a full UCTE member. A future connection with the Slovak Republic is contemplated. The 750 kV highvoltage link with Ukraine is not currently operational; 400 kV links exist with former Yugoslavia and Romania. This grid layout reflects the gradual development of the generation and distribution system and Hungary’s past as a country that was largely dependent on electricity imports, and whose main concern was to distribute imported electricity. Although large parts of the grid, especially the 220 kV grid, are old and in need of overhaul, external supply sources are currently more diversified and there are no transmission constraints within Hungary itself.

Figure 38 Final Consumption of Electricity by Sector, 1973 to 2020 4

3 Industry Residential 2 Transport Other*

Mtoe

1

0 1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

* includes commercial, public service and agricultural sectors. Sources: Energy Balances of OECD Countries, IEA/OECD Paris, 2002; and country submission.

53. Poland and the Czech and Slovak Republics founded CENTREL to co-ordinate their electric power companies. CENTREL’s objective was to rapidly improve their power systems to attain UCTE standards, to synchronise their networks and to become UCTE members. Synchronisation with UCTE meant disconnecting the CENTREL system from the UPS/IPS system. The CENTREL countries achieved this in 1993; following which, their possibilities to trade with electricity suppliers outside of CENTREL was strongly reduced.

116

Figure 39 Yearly Electricity Consumption per Inhabitant in the Supply Regions, 1980, 1990 and 2000 (kWh)

117

Source: MVM.

DISTRIBUTION AND CONSUMPTION On average, Hungarians consumed around 2 900 kWh of electricity per capita in 2000 (against 5 900 kWh in the EU). It is important to note that electricity demand, which reached 40.7 TWh in 1989, collapsed after 1990 as a consequence of the breakdown of the centrally-planned economy. Although it began to grow again in mid-1992, consumption did not reach its 1989 level in 2001 when total sales amounted to 32 TWh. Final electricity consumption in industry collapsed after 1990 but recovered in the mid-1990s, with electricity demand increasing unabated in the residential and commercial sector and remaining unchanged in the transport sector.

TOWARDS A COMPETITIVE ELECTRICITY MARKET Two Parallel Electricity Markets The Hungarian administration has already transposed the EU Directive on Electricity (Directive 96/92/EC) into Hungarian law. The new Electricity Act was presented to the Parliament on 18 December 2001 (Act CX of 2001 on Electricity) and adopted on 1 February 2002. The Electricity Act envisages competition from 2003 when it will open the retail market with the largest consumers (above 6.5 GWh per annum consumption, representing around 35% of the market share) obtaining the right to choose their supplier. A gradual opening of the market until all customers are free to choose their suppliers is planned by 2010. The new law recognises the three existing categories of market players (power producers, distributors and the grid operator) and defines a new group, the power traders that will operate from 2003 onwards. Some provisions of the act were implemented immediately after the act was adopted, namely the status and independence of the MEH were reinforced (see below), and MAVIR was given the mandate of independent system operator. The Electricity Act is in full harmony with the recommendations made in the 1999 IEA In-depth Review and the OECD regulatory review on Hungary 54. Secondary legislation is currently being designed, which will cover purchasing power agreements (between the wholesaler and power generating companies); stranded costs 55; cross-border regulation; price regulation of non-eligible consumers, renewable energy, CHP and system services. The price

54. Regulatory Reform in Hungary, Reviews of Regulatory Reform, OECD Paris, 2000. 55. Stranded costs could possibly arise with new entrants selling power at prices below the prices in existing long-term purchasing power agreements.

118

regulations will include fees for funding possible stranded costs up to 2010 (for long-term contracts signed before the market opening), fees for renewable energy development and CHP, and fees for unsolved past problems, such as investments to pursue environmental retrofits of old plants. The main provisions of the Electricity Act are the following: ●

Opening of the market will be introduced by a government decree.

●

In 2003, two parallel electricity markets will be created, namely a market to supply non-eligible consumers 56 and a competitive market to supply eligible consumers. In the first market, there is no competition and prices are determined by the MEH (see below), MVM is the exclusive wholesaler company and the six regional distribution companies will supply noneligible customers since they are themselves eligible consumers.

●

Eligible consumers are free to choose their own suppliers.

●

Foreign electricity trade is liberalised.

●

MAVIR is responsible for maintaining the balance of the system, for integrating short- and long-term capacity plans and for integrating electricity trade contracts. MAVIR is also responsible for monitoring transmission prices.

●

TPA to the electricity grid is guaranteed at regulated prices. Transmission, distribution and system operation tariffs are set and published by the Ministry of Economy and Transport.

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New capacities are established on a commercial basis through an authorisation process.

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Licensees must legally unbundle their transmission, distribution and supply activities.

The MEH is currently responsible for licensing energy suppliers 57, supervising the satisfaction of consumer demand and the standards of service provision, and protecting consumer interests. In a liberalised electricity and gas market the MEH has become more autonomous and its duties and competences have increased: ●

The MEH is a budgetary corporate body with separate and independent financial management.

56. Also referred to as public utility market, for captive consumers. 57. New licences must be issued in the liberalised market. MVM currently operates with one licence, but requires five in the liberalised framework: one licence for MAVIR as system operator, one licence for MVM to transmit, one licence to manage the regulated wholesale activity, one licence for trading and one licence to generate.

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The MEH will be self-financing. Licensees will be charged a regulatory fee for its supervisory activities.

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Following a proposal by the Ministry of Economy and Transport, the prime minister will appoint and dismiss the MEH president and vice-president. Their appointment is for a six-year term.

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The MEH president will report to Parliament, on an annual basis, on the MEH’s activities and publish an annual report.

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MEH resolutions can only be challenged and amended in court.

Some major pieces of the regulatory framework, such as grid code, distribution code and commercial code are yet to be designed by the regulator and adopted by government. Electricity Prices Hungarian consumers spend approximately 3.8% of GDP on electric energy, which is far more than in most other IEA countries 58. In the absence of competition, efficient price regulation plays important micro and macroeconomic roles. Electricity price regulation is currently based on price caps. The price regulation systems proclaimed in the ministerial decrees in November 1995 entered into force on 1 January 1997. The prices were determined on the basis of cost revisions carried out in the generation companies. The regulated price mechanism was established for a four-year period, from 1997 to 2000. During this period, the official energy prices were modified on the basis of a cost-plus price formula, thereby preventing excessive price growth and providing predictable price regulation. Since 1 January 1999, electricity and heat price regulation are based on the calendar year. The end-user price regulation mechanism used by the MEH applies to heat and electricity prices. After the initial four-year regulation period, a new period began in 2001 and is expected to end in 2004. During this period, the price prevailing at 1 January 2001, the so-called starting price, is used as the basis for price escalation. This starting price was based on the 1999 MEH cost survey of all concerned energy companies, which updated the surveys that were carried out in 1995 and 1996. It contains justified operational costs, including capital investment required for power production. In order to fulfil its function as a price regulator, the MEH monitors electric utilities’ costs on a continuous basis, and puts downward pressure on the costs by disallowing certain costs or cost elements.

58. Hungarian Energy Office, Privatised Electricity Suppliers in Hungary, 1996-2000, Budapest, 2002.

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Figure 40 Electricity and Heat Regulated Price Formation, 1 January 2001 to 31 December 2004

Price index of fuels

Official exchange rate change index calculated on the basis of the devaluation rate of the HUF compared to the euro

Dec./Dec. type monthly consumer price index excluding energy prices

Efficiency improving factor (k ) 0.7